BUILDING  FOR  PROFIT 


PRINCIPLES  GOVERNING 

THE  ECONOMIC  IMPROVEMENT 

OF  REAL  ESTATE 


BY 

REGINALD  PELHAM  BOLTON 

AUTHOR  OF   "POWER   FOR   PROFIT,"    "ELEVATOR  SERVICE** 
MEMBER  OF  THE  AMERICAN   INSTITUTE   OF  CONSULTING   ENGINEERS 


THE  THIRD   EDITION 


NEW  YORK 


THE  DEVINNE 
1922 


Copyright,  1911,  1922,  by 
R.  P.  BOLTON 


CONTENTS 

CHAPTER  PAGE 

I.  RELATION  OF  SITE  AND  BUILDING 5 

II.  APPRECIATION  OF  VALUE  OF  LAND    • 15 

III.  VALUES  ESTABLISHED  BY  BUILDINGS 35 

IV.  DEPRECIATION  OF  THE  VALUE  OF  BUILDINGS 

i.  PHYSICAL  DETERIORATION 50 

n.  THE  ECONOMIC  LIFE  OF  BUILDINGS 66 

V.  DEPRECIATION  OF  MECHANICAL  EQUIPMENTS  AND  POWER 
PLANTS 

i.  PHYSICAL  DETERIORATION .  79 

ir.  ECONOMIC  DETERIORATION 85 

VI.  COST  OF  OPERATING  BUILDINGS 94 

VII.  MANUFACTURING  OR  POWER  MACHINERY 108 

VIII.  APARTMENT-HOUSES,  FAIR  VALUES,  AND  FAIR  RENTS   .     .119 


547f,?9 


TABULATIONS 

TABLE  PAGE 

A.  RENTALS  AND  COSTS  OF  CONSTRUCTION 47 

B.  LIFE  OF  COMPONENT  PARTS  OF  BUILDINGS 62 

C.  ASCERTAINING  THE  MEAN  LIFE  OF  A  BUILDING 65 

D.  ECONOMIC  EXISTENCE  OF  BUILDINGS 76 

E.  PERCENTAGE  OF  VALUE  TO  BE  INVESTED  ANNUALLY     ...  77 

F.  PHYSICAL  EXISTENCE  OF  MECHANICAL  APPARATUS    ...  82 

G.  ECONOMIC  EXISTENCE  OF  MECHANICAL  APPARATUS    ...  89 
H.  OPERATING  EXPENDITURES 95 


DIAGRAMS 

FIGURE  PAGE 

1.  Relative  Costs  of -Construction 8 

2.  Elementary  Building n 

3.  Increase  in  Value  of  Land 17 

4.  Loss  on  Building  Balanced  by  Land 19 

5.  Loss  on  Building  Exceeded  by  Land 21 

6.  Gain  on  Land  Less  than  Loss  on  Building 23 

7.  Effect  of  a  Gain  in  Land  Value 25 

8.  Ratio  of  Land  Value  to  Net  Earnings 27 

9.  Capitalized  Value 45 

10.  Depreciation  of  Various  Buildings 58 

11.  Depreciation  of  an  Office  Building 64 

12.  Depreciation  of  Brick  Buildings 67 

13.  Depreciation  of  a  Mechanical  Equipment 84 

14.  Operating  Expenditures 101 

15.  Effect  of  a  Manufacturing  Plant 115 


PLATES 

Accumulating  Floor  Area  on  One  Site  .     .     .     .     .     .     Frontispiece 

FACING   PAGE 

Effect  of  Local  Conditions  on  Land  Values 15 

Pledges  Involved  in  Over-investments 30 

Value  of  Frontage  for  Advertising 35 

Gain  by  Reduction  of  Building  Area 38 

Justifiable  Expenditures  for  Decorations 42 

Change  in  the  Isolation  of  Manhattan 50 

Temporary  Enjoyment  of  Light  and  Air 54 

Over-expense,  a  Cause  of  Decay 72 

Confusion  in  Developments 79 

Buried  Piping .86 

Antiquated  Machinery 90 

Irregularities  in  Improvements 94 

Monotonous  Developments 108 

Unremunerative  Machinery 116 


INTRODUCTION 

TO     THE     THIRD     EDITION 

THE  absorption  of  two  editions  of  this  work,  and  many  expres- 
sions of  a  desire  for  its  re-issue  in  a  third  edition,  indicate 
that  it  has  rendered  practical  service  to  those  interested  in  real 
estate.  Its  presentation  of  the  subject  proved  of  value  in  the 
discussions  of  the  methods  and  effects  of  the  zoning  system 
and  its  application  to  the  City  of  New  York,  a  system  by  which 
some  of  the  unregulated  and  ill-considered  building  operations, 
to  which  attention  was  directed,  are  now  considerably  and 
beneficially  restricted. 

Since  the  second  edition  of  "Building  for  Profit"  was  issued, 
the  real  estate  and  building  interests  have  passed  through  the 
disturbed  and  inflated  conditions  resulting  from  war,  and  have 
entered  upon  a  course  of  slow  readjustment.  The  cessation  of 
new  construction  brought  about  a  shortage  of  available  space 
in  all  types  of  building,  and  a  general  increase  of  rentals  fol- 
lowed. Many  unremunerative  properties  thus  became  self- 
supporting,  and  others  exchanged  ownership  at  substantially 
advanced  prices. 

While  these  results  afford  the  appearance  of  an  advance 
in  the  value  of  improved  real  estate,  the  actual  effects  demand 
careful  consideration  and  analysis.  The  expense  of  operation 
and  upkeep  of  buildings  also  increased  very  largely,  while  the 
cost  of  mortgage  money  as  well  as  the  prevailing  rate  of  in- 
terest upon  investments  moved  to  higher  levels.  Such  condi- 
tions, however,  are  subject  to  reaction,  and  deflation  has  al- 


Introduction 


ready  commenced.  The  figures  of  rents,  operating  costs,  and 
values  which  were  used  in  this  book  to  illustrate  the  funda- 
mental principles  which  it  sets  forth,  have  not  been  altered  in 
this  edition,  as  they  still  retain  their  value  for  comparative 
purposes.  Moreover,  re-computation  of  these  illustrations  on 
present  prevailing  rates,  prices,  and  costs,  demonstrates  that 
the  same  principles  hold  good  under  existing  developed  con- 
ditions. 

In  this  edition  foot-notes  have  been  added  to  direct  atten- 
tion to  the  effect  of  such  changes  as  have  taken  place.  The 
interested  reader,  with  a  knowledge  of  any  prevailing  prices 
or  values,  can  make  deductions  applicable  to  existing  con- 
ditions. 

Certain  new  elements  have  entered  into  the  operation  of 
improved  real  estate,  to  which  attention  is  drawn  in  new  ma- 
terial added  to  this  edition.  The  income  tax  has  now  made  it 
necessary  to  give  consideration  to  depreciation  and  obsolescence 
as  determinate  elements  in  the  cost  of  operation.  The  rela- 
tively short  period  of  economic  life  of  modern  buildings,  to 
which  particular  attention  was  directed,  has  been  demonstrated 
by  many  illustrative  occurrences.  The  large  increase  in  the 
cost  of  materials  and  labor  affecting  the  operation  and  upkeep 
of  buildings  has  had  a  beneficial  effect  in  directing  the  attention 
of  owners  of  buildings  to  the  subject  of  economy,  and  the  re- 
duction or  elimination  of  the  burdens  of  gratuitous  services 
afforded  to  tenants.  The  principle  of  payment  for  services 
supplied  has  been  widely  applied  to  electric  light  and  power. 

Substantial  economies  have  been  developed  by  the  abandon- 
ment of  power-generating  apparatus  and  by  the  reduction  of 
mechanical  and  heating  apparatus  to  the  simplest  elements. 
The  difficulties  which  have  thus  been  solved  in  this  manner  may 
prove  of  permanent  benefit  to  both  the  owners  and  occupants 
of  buildings. 


Introduction 


The  ownership  of  residential  property,  particularly  multi- 
family  buildings,  has  become  involved  in  legislative  restrictions 
and  is  now  subject  to  responsibilities  which  appear  to  be  per- 
manent. Personal  liability  is  now  incurred  by  owners  in  the 
maintenance  of  services  and  adequate  upkeep  and  repair. 

Rentals  are  subject  to  court  review,  involving  careful  ascer- 
tainment of  expenses,  costs,  and  property  values  by  which  fair 
rates  of  rent  are  determinable.  To  these  new  problems  as  well 
as  to  those  of  old  standing  the  third  edition  of  "Building  for 
Profit"  will,  it  is  hoped,  bring  intelligent  consideration,  help- 
ful suggestions,  and  practical  solutions. 

R.  P.  B. 


I 

RELATION  OF  SITE  AND  BUILDING 

AmiLDiNG  is  a  mechanical  composite  construction  of 
various  materials,  serving  the  purpose  of  shelter  for  its 
contents  and  occupants. 

The  interior  is  its  utilizable  portion.  The  primary  object  of 
its  exterior  is  to  resist  the  ingress  of  the  atmospheric  elements, 
though  it  is  secondarily  utilized  and  extended  for  decorative, 
esthetical,  or  advertising  effects.  Such  additions  to  the  exterior 
and  to  the  interior  are  economic  only  to  the  extent  to  which  they 
contribute  to  induce  a  higher  value  to  be  placed  upon  the  use  or 
occupancy  of  the  structure. 

The  materials  forming  the  exterior  construction  or  decora- 
tion are  subject  to  special  physical  deterioration,  due  to  expo- 
sure to  atmospheric  action. 

A  commercial  building  is  one  the  object  of  which  is  to  pro- 
duce, by  a  rental  paid  for  its  occupancy,  a  return  or  percentage 
upon  its  cost  and  upon  the  value  of  the  site  which  it  occupies. 

The  value  of  the  land  or  site  on  which  any  building  is  erected 
may  appreciate,  but  such  appreciation  is  of  no  present  value  to 
the  owner  unless  the  building  returns  an  interest  upon  such  in- 
creased value;  thus  any  increment  in  value  of  land,  unaccom- 
panied by  proportionate  income  from  the  building,  is  reducible 
by  such  a  rate  of  interest  upon  the  increment  as  would  be 
earned  if  it  were  sold  and  the  money  invested  elsewhere. 

The  value  of  the  site,  unimproved,  is  that  which  some  pur- 
chaser may  be  willing  to  place  upon  it,  by  reason  of  its  desira- 

5 


Building  for  Profit 


bility,  its  local  surroundings,  or  its  effect  on  other  structures. 
It  is  not  mathematically  determinable  unless  improved  by  a 
building  upon  the  site,  the  earnings  and  life  of  which  decide  the 
actual  financial  value  of  the  site. 

The  fundamental  form  of  real  estate  improvement  is  a  habit- 
able structure  of  one  story  occupying  the  entire  area  of  the  site. 
When  the  site,  by  reason  of  the  scarcity  of  other  available  land, 
or  by  the  effect  of  contiguous  developments,  becomes  so  en-, 
hanced  in  marketable  value  as  to  require  a  return  in  the  way  of 
interest  exceeding  the  renting  capabilities  of  such  a  limited 
structure,  it  becomes  commercially  necessary  to  increase  its 
rentable  area  by  the  addition  of  other  stories. 

Modern  facilities  of  construction  in  the  direction  of  height 
place  in  the  power  of  a  single  property-owner  the  ability  to 
create  a  disproportionate  competition  affecting  neighboring 
properties.  Whereas,  in  bygone  times  one  building  was  cus- 
tomarily or  perhaps  necessarily  of  height  similar  to  its  neigh- 
bors, it  may  now  vastly  exceed  them,  and  may  introduce  into 
their  immediate  vicinity  a  disproportionately  large  addition  to 
the  habitations  of  the  neighborhood,  increasing  the  local  com- 
petition for  tenants,  and  tending  to  lower  the  prevailing  rate  of 
rentals,  either  by  directly  reducing  the  rate,  or  by  involving  the 
current  rate  in  the  costs  of  conveniences  or  inducements  offered 
as  part  thereof. 

While  the  process  of  accumulating  floor  area  on  one  site  can, 
by  modern  methods,  be  extended  to  an  almost  unlimited  height, 
the  addition  of  height  to  the  structure  is  accompanied  by  a  rela- 
tive increase  in  cost,  which  involves  a  progressive  relative  in- 
crease of  earning  capacity,  and  acts  as  an  economic  restriction. 

Comparisons  of  cost  of  construction  of  modern  buildings  are 
conveniently  based  on  computation  of  their  cubical  contents, 
and  this  may  then  be  utilized  to  compare  relative  costs.  The 
elements  composing  the  cost  are  many  and  varied,  yet  for  any 

6 


Relation  of  Site  and  Building 


given  set  of  surrounding  or  local  conditions  the  variation  of 
values  relative  to  height  will  be  found  to  follow  practically 
similar  relations.  Thus,  if  a  typical  or  normal  building  of  a 
given  height  be  adopted  as  a  standard  of  comparison,  other 
buildings  of  similar  character,  but  of  greater  or  less  height,  will 
be  found  to  bear  a  certain  proportion  in  relative  cost  of  con- 
struction. Prices  of  materials  and  labor  may  and  do  rise  and 
fall,  but  this  merely  affects  the  total  costs  and  not  the  relative 
costs.  In  Fig.  i  the  relative  costs  of  construction,  as  regards 
height,  of  two  classes  of  building,  viz.,  the  business  or  office 
building  and  the  loft  or  light  manufacturing  building,  are 
plotted  from  a  number  of  observations  of  actual  expenditures, 
and  the  form  of  the  variation  shown  by  the  curves  indicates  a 
harmonious  gradation  from  a  unit  of  a  basic  or  normal  build- 
ing, which  may  in  the  one  case  be  taken  as  including  twelve 
floors,  or  a  height  of  150  feet  above  the  curb,  and  in  the  other 
case  eight  stories,  or  a  height  of  96  feet. 

The  cost  of  a  certain  design  of  building  being  ascertained  or 
estimated  at  the  basic  height,  the  result  as  a  total,  or  by  the  rate 
per  cubic  foot,  may  be  multiplied  by  the  factor  given  in  the 
curve,  for  any  Other  height  in  the  diagrams. 

The  elements  which  compose  this  difference  of  relative  cost 
will  be  readily  perceived  to  consist  of  extra  material  such  as 
steel  and  foundations,  and  additional  thickness  of  walls,  added 
to  which  are  additional  costs  in  handling  materials  as  height  is 
extended,  and  a  relative  increase  of  carrying  charges  on  the 
financial  side  of  the  undertaking.  Added  to  this  are  progressive 
additions  of  equipment,  such  as  those  involved  in  elevators, 
stairways,  fire-escapes,  and  sanitary  appliances,  and  progres- 
sive additions  to  the  proportions  of  heating,  water,  sanitary, 
electrical,  and  other  systems  of  piping  and  conductors.  All 
these  elements  render  construction  relatively  more  expensive  as 
height  is  added,  so  that  in  the  result  a  cubic  foot  of  business 

7 


Building  for  Profit 


FIG.  1 


150 

7 
/ 

/JU 

t     29 

>           28 

in 

1 

t 

-/               27 

Approximate  Scale  of  Feet  g  g  £ 

/ 

/ 
/ 
/" 

1                  ''S 

8      BiscHeKht    ,'' 

^ 

91; 

/ 

7       -            ^ 

[ 

23 

275 

7                / 

/                    LOFfT 
6    t      __L 

BU  LDINGS 

____/_. 

t 

0) 

u. 
-250  ^ 
O 

0) 
(U 

-225I 

"ca 
.E 
"x 
o 

-200    *- 

20     - 

18             .9             1.0           1. 
Scale  of 

1            1.2            1.3           1.4               > 

en 

7* 
/ 

U. 

o 

0 

7 
/ 

0) 

u. 

'o 

/ 
£ 

17    g 
</) 

16         H 

o 

n) 

7 
/ 

1  5 

Q. 

<t 

1  75 

C/J 

/ 

-                     14     - 

^  • 

13 

-150 
-125 
HOO 

,''' 

Ba 

c  Height      ,3 

/ 
/ 
£ 

1  1 

/              BUS 

INESS  OR  OFFICE  £u  LyDlfJGjS 

10     - 

7 
^ 

9 

/ 
± 

a 

.8            .9            10           1 

1            1.2            13            1.4             1.5 

Scale  of  Factors 

1  6             17 

RELATIVE  COSTS  OF  CONSTRUCTION 

8 


Relation  of  Site  and  Building 


building  construction  in  a  building  of  the  basic  height  of  150 
feet  will  be  found  to  have  increased,  at  double  that  height,  to 
1.575  of  the  basic  price. 

Furthermore,  an  increase  of  area  by  vertical  addition  involves 
cumulative  expenditures  in  upkeep,  maintenance,  and  operation, 
and  these  tend  to  increase  at  an  increasing  ratio,  as  compared 
with  the  addition  to  the  height. 

The  addition  of  height  to  a  building  does  not  necessarily  in- 
volve a  multiplication  of  tenancies,  but  usually  does  so.  Any 
subdivision  of  tenancy  involves  the  ownership  or  control  in 
responsibilities  not  only  for  the  provision,  but  for  the  operation 
of  conveniences  common  to  all  the  inhabitants  of  the  building, 
the  cost  of  which  then  becomes  a  fluctuating  element  of  ex- 
penditure and  reduces  the  value  of  the  rentals  obtainable. 

The  economic  addition  of  height  in  a  building  on  a  given  site 
is  that  which  will,  upon  a  certain  obtainable  rental,  return  a 
market  interest  upon  the  value  of  the  land  and  upon  the  cost  of 
the  structure,  and  it  follows  that  the  relation  between  the  mer- 
chantable value  of  the  site  and  the  average  rentals  obtainable  in 
its  locality  establishes,  at  any  given  rate  of  interest,  not  only  the 
height,  but  the  justifiable  expense  of  construction  of  that  height. 

The  net  earnings  may  be  conveniently  considered  in  two  parts, 
one  of  which  is  to  provide  the  interest  upon  the  assumed  value 
of  the  site,  and  the  remainder  to  make  a  suitable  return  upon 
the  cost  of  the  building. 

As  modern  methods  of  construction  are  now  well  established, 
as  regards  both  cost  and  space  available  for  occupation  in  vari- 
ous types  of  buildings,  it  becomes  practicable  to  lay  down  a 
mathematical  relation  between  any  land  value  and  the  economic 
building  upon  the  site  which  will  produce  a  predetermined  rate 
of  interest  upon  the  site  and  upon  the  building.  Such  a  method 
is  given  in  the  following  formulas,  by  which  for  any  value  of 
land  or  any  cost  of  building,  and  for  any  proportion  of  rented 

9 


Building  for  Profit 


area  to  area  of  the  site,  and  for  any  relation  of  net  income  to 
total  rentals,  the  rate  may  be  established  for  rentals  per  square 
foot  per  annum  which  must  be  obtained  in  order  to  maintain  a 
given  rate  of  interest  upon  the  engagement  of  capital. 

This  method  of  computation  is  based  on  the  "Elementary 
Building"  shown  in  Fig.  2,  a  vertical  section  of  a  building  one 
square  foot  in  plan  area,  occupying  the  whole  or  a  less  part 
of  the  site,  and  having  a  certain  proportion  of  each  of  its  floors 
occupied  as  rentable  space.  This  unit  affords  a  direct  relation  be- 
tween proportion  of  site,  building,  and  rented  areas  and  between 
their  respective  monetary  relations,  and  these  being  established 
can  be  multiplied  by  the  total  of  each  item  in  any  particular 
instance. 

No.  i.     Rate  of  rental  per  square  foot  of  net  rentable  area 
required  to  produce  interest  on  value  of  the  site: 

10000  x  V  x- 
.  _JL 

fxnxp 

V  =  value  of  site  per  square  foot. 
i  --  rate  of  interest  on  investment. 
r  =  ratio  of  net  income  to  total  income. 
n  =  per  cent,  of  occupied  or  net  rentable  area  to  gross  area 

of  building  floors. 

p  =  percentage  of  site  occupied  by  building. 
/  =  number  of  stories  in  building. 
A  =  rent  per  square  foot  required  in  dollars. 

EXAMPLE: 

Question:  What  rental  per  square  foot  per  annum  is  re- 
quired to  produce  an  interest  of  4%  on  the  investment  in 
the  site  under  the  following  conditions? 

10 


Relation  of  Site  and  Building 


FIG.  2 


=  Average  height 
per  story  including 
proportion  of  basement 

n=Net  rentable  area 
(a  percentage  of  "p") 


.p=Gross  building  area.  1  sq.  ft. 
(a  percentage  of  site) 


Basement 


ELEMENTARY  BUILDING 
II 


Building  for  Profit 


Answer:    Assuming— 

V  =  land  value  per  square  foot       .      fa)  $150  .   (b)  $100 
i  =  interest        ..........      percent.     4 

r  =  net  income  ..........      per  cent.  45 

/=  15  stories    ..............   15 

n  =  net  rentable  or  occupied  area        .     .     .      per  cent.  70 
p  =  per  cent,  of  site  occupied  by  building    .....  90 

Then,  substituting  for  the  letters  in  the  formula 

10000  x  V  x- 


fxnxp 

we  have:  (a) 

10000  x  150  x-3 

A  =  -  -  —  -  -  =  $1.40  rental  required  per  square 

*     /  foot  net  rentable  area, 

or  (b)  For  a  land  value  of  $100, 

10000  x  100  x  ^ 
A  =     15  x  70x90  ^    =  94  cellts'  being  the  rental  re~ 

So  that  $1.40  per  square  foot  must  be  provided  out  of  net  in- 
come to  afford  interest  on  the  site  of  a  value  of  $150  per  square 
foot  with  a  building  of  fifteen  stories,  and  if  a  land  value  were 
assumed  of  $100  per  square  foot,  under  the  same  conditions, 
$0.94  would  provide  the  interest.  To  this  amount  is  now  to  be 
added  the  amount  required  to  pay  interest  on  the  cost  of  the 
building,  as  follows  : 

No.  2.    Rate  of  rental  per  square  foot  of  net  rentable  area  per 
annum  required  to  produce  interest  on  cost  of  building: 


TOO  x  v  x- 


a  = 


j  x  n 

h  =  average  height  of  stories. 
/  —  number  of  stories. 

12 


Relation  of  Site  and  Building 


H  =  h  multiplied  by  /,  or  height  of  building  in  feet. 
c  —  cost  in  cents  of  construction  per  cubic  foot  of  building. 
k  =  carrying  expenses  during  construction  in  per  cent,  of 

cost  of  construction. 

v  ==  value  of  building,  or  H  multiplied  by  c  plus  k. 
n  •=.  per  cent,  of  net  rentable  area  to  gross  area  per  floor. 
i  =  rate  of  interest. 
r  =  ratio  of  net  income  to  total  rentals. 
a  =  rent  per  square  foot  required. 

NOTE  :    Assuming  a  gross  building  area  of  I   square  foot,  then  the  contents  in  cubic  feet 
corresponds  to  the  height  (//)  in  feet.     See  Fig.  2. 

EXAMPLE: 

Question:    What  rental  per  square  foot  per  annum  is  re- 
quired to  produce  an  interest  of  4%  on  the  cost  of  the 
building? 
Answer:    Assuming — 

/  =  building  of stories   15 

h  =  average  height  per  story feet   12.52 

c  =  cost  per  cubic  foot cents  50 

k  =  carrying  expense .      percent.   10 

n  —  net  rentable  or  occupied  area      .     .     .      per  cent.  70 

i  =  interest per  cent.     4 

r  =  net  income,  of  rentals     .     .     .     .     .     .      per  cent.  45 

Then,  substituting  for  the  letters  in  the  formula 

i 

100  x  v  x- 
r 


i*  —  r 

j  x  n 
we  have : 

4 

IOO  X  IO34O  X^ 

a  =  -  —  —  86.4  cents,  rental  required. 

15  x  70 

NOTE  :  The  cost  of  basement  is  included  in  h  by  adding  a  proportion  of  its  height  to  the 
average  height  per  story,  and  thus  the  rental  required  on  the  stories  f  includes  basement 
rental  as  a  part  of  first-story  rental. 

13 


Building  for  Profit 


The  two  foregoing  results  combined  thus  aggregate  $2.26, 
which  is  therefore  the  average  rental  per  square  foot  per  an- 
num on  all  floors  which  is  necessary  to  produce  4%  on  the 
investment  in  the  land  valued  at  $150  per  square  foot  and  in 
the  fifteen-story  building  which  has  been  assumed  to  be  erected 
thereon,  or  on  land  valued  at  $100  per  square  foot  the  rental 
would  be  $1.80  per  square  foot  per  annum. 

It  will  be  observed  that  if  the  land  should  increase  in  value 
after  the  foregoing  conditions  are  established,  then  the  average 
rentals  thus  ascertained  must  be  raised,  or  the  rate  of  interest 
upon  the  land  part  of  the  investment  will  decline. 

Inversely,  if  the  rate  of  interest  on  the  entire  investment  be 
stationary  or  should  it  decrease,  then  any  increment  in  the  value 
of  the  land  becomes  unremunerative,  in  the  same  manner  as 
vacant  land  would  be,  and  from  any  assumed  increased  value 
of  the  land  there  must  annually  be  deducted  the  interest  thereon, 
at  the  rate  which  the  land  is  actually  earning. 

The  rate  of  annual  net  return  upon  the  building  should  be 
such  as  to  include  in  itself  an  amount  which  at  compound  inter- 
est will  return  the  value  of  the  building  within  some  space  of 
time,  since  appreciation  of  rentals  cannot  be  assumed  with  cer- 
tainty, or  if  assumed  they  may  be  accompanied  by  relative 
increase  in  cost  of  operation. 

This  is  what  occurred  as  a  result  of  the  shortage  of  new 
buildings  during  the  disturbed  period- — 1917-20 — when  the 
greatly  enhanced  cost  of  operation  of  buildings  was  accom- 
panied by  a  large  and  not  always  proportionate  increase  in 
rentals,  both  being  still  further  affected  by  the  decrease  in  the 
purchasing  value  of  the  dollar  and  resulting  rise  in  the  price 
of  money,  reflected  in  higher  rates  of  interest  on  mortgage  and 
investment. 


r-    (/•. 

rt    C 


II 

APPRECIATION  OF  VALUE  OF  LAND 

IF  the  earning  capability  of  a  building  should,  for  any  cause, 
fall  below  the  point  where  the  return  upon  the  invested 
value  is  less  than  market  rate,  then  the  only  means  of  re- 
habilitation of  the  impaired  capital,  or  provision  of  security  for 
the  investment  of  further  capital  in  reconstruction  or  altera- 
tion, is  to  be  found  in  some  increase  or  appreciation  in  value 
of  the  site,  or  what  is  commonly  referred  to  as  the  "unearned" 
increment  of  land  value. 

This  is  the  commonly  stated  and  usually  assumed  remedy  for 
any  anticipation  of  a  decrease  in  its  earning  ability,  and  it  is 
a  usually  accepted  excuse  for  evading  the  necessity  for  a  provi- 
sion in  advance  for  the  gradual  aging  of  the  structure. 

As  a  solution  of  either  anticipation  it  is  wrong  in  principle 
and  uncertain  in  effect. 

The  rate  of  appreciation  in  value  of  any  land  is  affected  by  a 
variety  of  exterior  conditions,  but  there  is  always  a  probability 
that  the  same  conditions  which  adversely  affect  the  building 
may  similarly  affect  the  land,  while,  on  the  other  hand,  those 
that  beneficially  affect  the  demand  for  the  land  may  be  adverse 
to  the  conditions  of  the  building  upon  it. 

An  assumed  appreciation  is  not  always  realizable  as  an  actual 
asset,  and  the  most  that  can  be  made  of  it  may  be  to  borrow 
upon  its  security. 

Appreciation  of  the  land  may  not  be  realizable  unless  the 
building  be  first  removed  and  a  different  improvement  erected. 

?5 


Building  for  Profit 


The  rate  at  which  appreciation  proceeds  is  not  independent 
of  other  property  in  the  same  locality.  One  site  cannot  be  un- 
duly forced  forward  in  the  march  of  enhancement,  in  face  of 
the  competition  of  others.  The  investment  of  disproportionate 
capital  in  an  improvement,  in  the  expectation  of  thereby  estab- 
lishing an  enhanced  capitalized  value  of  the  site,  is  unsound 
practice,  equivalent  to  placing  gold  upon  a  piece  of  land  in  order 
to  increase  the  value  of  the  combination. 

If  there  be  a  real  appreciation  it  will  be  due  to  a  legitimate 
demand  for  such  a  site,  or  for  occupancy  of  a  building  upon  it. 
Such  a  demand  will  naturally  and  properly  take  the  form  of  a 
higher  rate  of  rental,  which  will  return  upon  the  building  and 
the  increased  value  of  the  land  the  established  rate  of  interest. 

As  has  been  already  pointed  out,  the  appreciation  must  either 
be  established  or  capitalized  by  a  commensurate  return  from 
the  building,  or  it  becomes  unproductive,  and  if  interest  upon 
its  realizable  value  be  considered,  it  may  become  stagnated  or 
discounted  to  a  loss.  "Unearned  increment"  is  a  favorite  phrase 
with  those  who  have  made  little  study  of  real  estate  conditions, 
but  it  is  often  far  more  correctly  to  be  described  as  "unearning 
increment,"  bringing  only  an  increasing  burden  of  taxation. 

The  rate  at  which  increment  proceeds  is  usually  paralleled  by 
the  accumulation  of  interest  charges  upon  the  realizable  value 
and  of  taxes  and  assessment,  the  earning  power  of  which"  is  nil. 

If  such  matters  be  considered  it  will  be  found  that  some  of 
the  large  apparent  increments  in  land  long  held  in  one  posses- 
sion really  represent  nothing  but  past  outgoings  or  the  loss  of 
interest  on  a  lesser  value  which  might  have  been  realized  at 
some  opportune  period  of  demand  for  that  property. 

Take,  for  instance,  a  series  of  figures  of  values  of  a  plot  of 
land  in  the  Bronx  which  were  published  in  1909  by  Mr.  J.  Clar- 
ence Davies,  which  are  plotted  in  Fig.  3.  The  purchaser  of 
this  plot  in  1892  could  have  sold* it  the  following  year  for  a 

16 


Appreciation  of  Value  of  Land 


FIG.  3 


^  2 

ID    0 

4500 
4000 
3500 
3000 
2500 
2000 
1500 
1000 
500 

Per,°o 
Date 

/ 

/ 

/ 

/ 

./'' 

C4 

^ 

7* 

^>< 

w 

i**. 

**£ 

!•-  — 

7 

^ 

•—  •  —  : 





^ 

Asses 

nents 

^ 

ot  in^ 
Assesi 

ludin 
nents 

I 

"JP* 

(/> 

go 

begar 

U^ 

^ 

' 

aO\ 

—  —     — 

-1 

<$ 

d  of  years  1st     2nd      3rd      4th      5th     6th    '7th      8th      9th     10th    llth    12th    13th    14th    15th    16th    17th 
1892  1893  1894  1895  1896  1897  1898  18991900   1901  1902  1903  19041905  1906   1907  1908  1909 

Increase    n  Value  of  lot  sold  at  auction  in  1892  showing  interest  and  Taxation 
on  increasing  Value  over  and  above  the  first  sellrng  value  after  purchase. 

profit  of  25%,  but  thereafter  the  interest  upon  that  value,  and 
the  taxation,  kept  equal  pace  with  the  selling  value,  so  that  a 
sale  at  a  market  price  during  the  succeeding  eight  years  would 
have  yielded  practically  no  further  profit. 

The  general  development  and  improvement  of  the  locality, 
which  began  at  the  end  of  the  eighth  year,  rapidly  advanced  the 
value,  but  it  must  be  assumed  that  it  also  brought  with  it  a 
parallel  advance  in  taxation,  as  well  as  the  payment  of  assess- 
ments. 

The  advance  in  value  continued  for  five  years,  and  reached 
the  highest  point  of  profit  in  fourteen  years  from  the  original 
purchase ;  but  there  the  advance  in  value  ceased,  a  result  due  to 
the  settlement  of  its  capitalized  value,  in  company  with  others, 
by  the  development  of  improvements  erected  in  the  vicinity. 

17 


Building  for  Profit 


The  owner  or  the  purchaser  who  continued  to  hold  such  a 
property  at  this  price  without  improvement  would  find  that  at 
the  end  of  ten  years  the  ostensible  profit  would  have  entirely 
disappeared  in  interest  charges  and  taxation,  or  at  an  earlier 
date  if  assessments  should  have  to  be  met. 

If  a  commensurate  improvement  should  have  been  made 
upon  the  land  at  the  period  of  highest  profit,  then  the  value  of 
the  land  would  have  been  established  and  carried  along,  re- 
lieved by  the  earnings  of  the  building  of  the  deductions  for 
interest  and  taxation. 

But  since  the  new  capital  embarked  in  the  building  must  be 
released  if  that  building  should  become  ineffective  by  age  or 
other  causes,  a  new  fund  must  be  established  to  meet  this  con- 
tingency, which  the  land  may  not  provide  and  which  should 
therefore  be  derived  from  some  part  of  the  earnings  of  the 
structure. 

It  must  be  conceded  that  the  annual  setting  aside  of  a  propor- 
tionate percentage  of  the  value  of  a  building  is  likely  in  many 
cases  to  be  a  heavy  charge  upon  net  income.  Thus,  on  a  prop- 
erty returning  a  net  5%,  the  building  being  two  thirds  of  the 
whole,  the  setting  aside  of  a  sufficient  sum  to  cover  thirty  years 
of  life  at  4%  compound  interest  involves  a  reduction  of  the 
return  upon  the  investment  of  1.068%,  reducing  a  5%  invest- 
ment to  a  4%  basis. 

But  unless  a  regularly  invested  and  proportionate  sinking- 
fund  be  maintained,  an  inevitable  dependence  must  be  placed 
upon  the  speculative  increase  in  land  value  to  offset  the  eventual 
loss  of  the  building.  The  burden  of  the  entire  original  cost 
of  the  building  is  then  laid  upon  the  land,  the  increment  in  value 
of  which  is  expected  to  respond  to  the  demand.  As  buildings 
of  a  permanent  character  usually  cost  more  than  the  value  of 
the  land  they  occupy,  it  follows  that  within  the  term  of  their 
useful  existence  the  land  is  required  to  increase  at  a  ratio  com- 

18 


Appreciation  of  Value  of  Land 


FIG.  4 


100 


90 


80 


70 


60 


50 


40 


30 


20 


10 


\ 


-35.32  years- 


10  15  20  25 

Scale  of  Years 


30  35 


Loss— 100 
Profit=100 


Loss  on  building  exactly  balanced  by  gain  on  land.    Neither  loss  nor  gain 
at  any  part  of  term 


Building  for  Profit 


mensurate  not  with  its  own  value,  but  with  that  of  the  expendi- 
ture on  the  building. 

Thus,  if  on  land  of  a  value  of  $10  per  square  foot  there  be 
erected  a  building  of  a  value  of  $20  per  square  foot  of  area  of 
its  site,  the  land  will  be  required  to  advance  in  value  during 
the  term,  say,  of  forty  years,  at  the  rate  of  5%  per  annum,  in 
order  to  bring  back  its  own  value  and  that  of  the  loss  on  the 
building  at  any  time.  If  the  building  be  unduly  large,  or  if  the 
expenditure,  especially  upon  decorative  and  non-earning  fea- 
tures, be  extravagant,  the  whole  burden  of  such  additions  would 
have  eventually  to  be  borne  by  the  land.  It  is  evident  that  most 
careful  regard  is  required  to  be  paid  to  the  avoidance  of  undue 
cost  of  construction. 

An  examination  of  the  effects  of  the  method  of  shouldering 
upon  the  land  the  depreciation  of  the  building  brings  out  some 
curious  features  which  exhibit  the  undesirability  of  the  practice. 

If  the  rate  of  increase  in  land  value  during  the  time  of  useful 
existence  of  the  building  does  not  exactly  follow  that  of  the  loss 
on  the  building,  then  there  is  eventually  either  a  greater  loss  or 
a  lesser  degree  of  profit,  by  extending  the  process  until  the  end 
of  the  term. 

Fig.  4  shows  a  term  of  useful  existence  of  a  building  of  35.32 
years,  and  a  rise  in  land  value  exactly  equivalent  to  that  of 
building  depreciation,  eventuating  in  neither  gain  nor  loss  at 
any  time.  Such  a  combination  would  seem  rare  if  not  wholly 
unlikely. 

In  Fig.  5  the  loss  on  the  same  building  is  shown,  largely  over- 
balanced by  gain  in  land  value,  but  the  eventual  profit  is  just  as 
well  secured  by  sale  at  one  half  the  term  and  investment  of  the 
profit  on  the  land  at  4%  compound  interest. 

In  Fig.  6  the  land  fails  to  respond  to  the  depreciation  of  the 
building,  and  an  eventual  loss  must  result.  This  may,  however, 
be  minimized  substantially  by  cutting  the  loss  at  half  the  term 

20 


Appreciation  of  Value  of  Land 

FIG.  5 

-35.32  y€ 

• 

I 

Profit 

( 

f>50 

/ 

, 

/ 

90 
80 

\ 

/ 

n 

f    / 

/ 

\ 

\ 

i; 
0 

/ 

H 

"     y 

/ 

1 

1' 

/# 

\ 

°/       F 

'        V 

/Wit  / 

^      /  c 

J' 

60 

\/ 

f     *&" 

\ 

/  ^ 

50 

a  / 

\y 

f 

/ 

/o\ 

40 

69  / 

'r- 

t 

* 

~f 

j 

0 

t' 

30 

/ 

/  & 

tg 

20 

*>$ 

5 

/ 
/ 

\ 

^ 

10 

// 

V 

/     / 

\ 

I/ 

\ 

n 

/ 

\ 

5              10            15             20             25             30             35 

Scale  of  Years 

Loss  on  building  exceeded  by  gain  on  land.     Profit  if  realized 
at  half  of  the  term  produces  equal  result 

21 


Building  for  Profit 


and  investing  the  proceeds  of  the  then  increase  of  the  land  value 
at  compound  interest. 

The  effect  shown  in  Fig.  6  is  further  developed  in  Fig.  7,  in 
which  an  assumed  life  of  35.32  years  is  again  adopted  for  a 
building  having  twice  the  value  of  the  land.  Here  the  rate  of 
increment  is  assumed  to  be  50%  greater  than  even  this  amount 
of  depreciation,  and  the  total  land  value  at  the  end  of  the  term 
to  be  400%  that  of  the  original.  Even  with  this  large  ratio  of 
appreciation  the  eventual  profit  would  be  increased  by  sale  of 
the  property  about  the  middle  of  the  term,  and  the  investment 
of  the  then  profit  at  5%  compound  interest. 

The  diagonal  line  P  K  shows  the  enhanced  values  obtained 
by  selling  off  the  property  at  periods  in  the  existence  of  the 
building  from  fifteen  to  twenty-one  years,  and  the  investment 
of  the  profits  at  5%  compound  interest  for  the  rest  of  the  term 
or  any  part  thereof. 

The  common  practice  of  dependence  upon  increment  of  land 
values  to  offset  depreciation  of  buildings  is  thus  found  to  be 
erratic  and  is  evidently  financially  unsound. 

It  is  sometimes  the  case  that  the  purchaser  of  an  improved 
property  has  paid  a  low  price,  which  is  practically  a  market 
value  of  the  property,  more  or  less  discounted  by  the  deprecia- 
tion of  the  building  up  to  that  date.  This  is,  in  effect,  a  re- 
settlement of  the  relation  of  the  land  value  and  the  building 
value,  but  the  process  of  depreciation  is  merely  started  from  a 
new  point  on  the  scale,  and  either  the  income  or  the  land  value 
must  take  up  the  progress  of  the  burden. 

There  can  be  little  hesitancy,  in  view  of  all  these  features,  in 
pronouncing  the  common  method  of  dependence  upon  rising 
value  of  land  to  be  unsound. 

Figures  are  often  quoted  of  phenomenal  rises  in  land  values. 
These  do  not  all  bear  investigation,  or,  sometimes,  show  that, 
with  enhanced  taxation  and  long  lack  of  earnings,  the  property 

22 


Appreciation  of  Value  of  Land 


FIG.  6 


10  15  20  25  30  35 


Loss  by  holding 
\to  end  of  term 


50 


.=   >  Profit  50 


Gain  on  land  less  than  loss  on  building.    Loss  reduced  by  sale 
prior  to  end  of  term 


Building  for  Profit 


might  have  represented  a  better  result  if  realized  at  some  prior 
date. 

The  reason  for  such  failure  to  realize  at  the  opportune  time 
is  often  not  far  to  seek.  After  reaching  the  level  at  which  the 
average  class  of  buildings  erected  in  the  locality  return  a  rea- 
sonable income  upon  book  values  of  the  combined  properties,  the 
land  value  of  any  neighborhood  is  apt  to  become  steadied,  and 
if  the  interest  of  investors,  as  well  as  the  demand  by  speculative 
builders,  has  for  the  time  ceased,  it  has  no  active  market. 

The  growing  absorption  of  all  land  on  the  island  of  Manhat- 
tan will  naturally  set  some  increase  of  value  on  all  desirably 
located  land  as  being  a  restricted  commodity,  but  the  investor  in 
buildings  cannot  afford  entirely  to  ignore  the  fact  that  the  isola- 
tion of  Manhattan  is  rapidly  disappearing  by  reason  of  tunnels 
and  bridges  to  other  districts. 

These  observations  reinforce  the  point  that  the  rate  of  appre- 
ciation of  land  value  is  speculative,  whereas  the  rate  of  struc- 
tural and  of  earning  depreciation  of  buildings  is  reasonably 
determinable. 

From  either  point  of  view  it  is  economically  desirable  that  the 
land  should  not  be  overburdened  with  unnecessary  expenditure 
in  its  improvement. 

It  has  been  observed  that  the  increase  of  the  value  of  the  land, 
whatever  be  its  rate  or  relation  to  original  cost,  is  unproductive 
in  itself,  and  unless  the  building  provides  a  return  upon  it,  it 
brings  only  upon  its  owner  the  attentions  of  the  taxing  au- 
thorities. 

It  may  be  suggested  that  the  best  policy  to  pursue  is  to  provide 
in  advance  for  such  an  enhanced  value  by  erecting  so  large  a 
building  that  its  net  returns  will  capitalize  the  increase  as  time 
proceeds.  Such  a  suggestion  looks  like  a  short  cut  to  an  entire 
disposition  of  this  question,  but  in  reality  it  offers  only  a  partial 
solution  of  the  problem  even  when  very  conservatively  practised. 

24 


Appreciation  of  Value  of  Land 


The  cost  of.  construction  of  a  tall  building  is  relatively  greater 
than  a  lower  one,  and  there  are  relatively  greater  burdens  im- 


Fic.  7 


15  20 

Scale  of  Years 


35. as  years 


Showing  the  effect  of  a  gain  in  land  value  in  excess  of  the  depreciation  on 

the  building,  when  a  greater  return  is  secured  by  realizing  profit 

before  the  end  of  the  term  of  existence 

mediately  set  up  by  its  additional  value,  in  taxation  and  assess- 
ments and  its  own  depreciation.  Not  only  so,  but  it  will  offer  a 
greater  obstruction  to  future  improvement  after  its  maximum 

25 


Building  for  Profit 


effect  has  been  reached.  Its  investment  constitutes  a  pledge 
upon  the  ability  of  the  land  to  maintain  its  desirability  and  of 
the  locality  to  maintain  a  rate  of  rental,  and  any  untoward 
future  occurrences  in  either  regard  are  magnified  in  their  effects 
by  its  additional  engagement  of  capital. 

Modern  methods  of  steel  construction  afford  very  wide  oppor- 
tunity for  building  ahead  of  the  values  of  any  site,  and  some  of 
the  unrelated  and  intrusive  structures  to  be  seen  in  the  borough 
of  Manhattan  are  the  present  result. 

The  ruling  consideration  in  this  connection  should  not  be  the 
maximum  expenditure  which  can  be  placed  upon  a  site  and  earn 
interest  on  its  own  cost  of  construction,  but  with  how  small  an 
investment  in  cost  of  construction  the  capitalized  value  of  the 
land  can  be  maintained. 

The  relation  which  the  earnings  necessary  to  establish  or 
maintain  the  value  of  a  site  bear  to  that  value  is  shown  in  Fig.  8, 
covering  annual  rates  of  interest  on  the  investment  of  4,  5,  and 
6%,  and  including  any  relation  of  the  cost  of  the  building  to 
that  of  the  land,  up  to  ten  times  the  value  of  the  latter. 

The  lower  diagonal  is  that  of  taxation,  based  upon  a  rate  of 
i  %  of  the  gross  value  of  the  whole  property.  The  second  line 
comprises  the  addition,  to  taxation,  of  a  fund  for  amortiza- 
tion of  the  original  cost  of  the  building  during  a  life  of  thirty 
years,  a  rate  of  compound  interest  being  assumed  for  this  fund 
of  4%  per  annum.  The  upper  lines  add  to  the  two  former  the 
rate  of  annual  interest  upon  the  whole  investment,  at  4,  5,  or 
6%. 

This  diagram  illustrates  the  extent  to  which  the  earning  ca- 
pacity of  a  site  may  be  pledged  or  overburdened  by  excessive 
building.  In  the  extreme  case  of  a  building  costing  ten  times 
the  value  of  the  site,  an  amount  practically  equaling  the  entire 
value  of  the  site  must  be  earned  every  year  in  order  to  maintain 
its  value  as  a  6%  investment. 

26 


Appreciation  of  Value  of  Land 


FIG.  8 


RATIO  OF  LAND  VALUE  TO  NET  EARNINGS 


90- 


80^ 


70- 


"2  60- 


'  CO 
-a 


50- 


10r 


345678 

Building  Cost  Times  Land  Value 


10 


Building  for  Profit 


EXAMPLE  : 

Land  value  $8  per  square  foot,  or      .....     $20,000 

per  city  lot  of  2500  square  feet. 

Cost  of  a  building  assumed  to  be  .......     $60,000 

or  three  times  that  of  land. 

Then  interest  at  5%,  added  to  depreciation  and 

taxation,  requires  the  improved  property  to  re- 

turn annually  29^/3  %  of  the  value  of  the  land,  or       $5,870 

This  return  of  5%  upon  the  value  of  land  and 

building  requires  a  gross  income  of  about  .     .     .     $12,000 

In  other  words,  the  renting  capacity  of  this  piece  of  land, 
which  in  its  unimproved  condition  requires  only  that  provision 
be  made  for  its 

taxation  of  say    ............        $200 

and  for  interest,  at  5%  on  its  value,  of    ....     $1,000 

or  a  total  of    .............     $1,200 

or  6%  of  its  value,  would,  by  the  improvement  assumed,  require 
the  owner  to  concentrate  on  it  interests  or  uses  capable  and 
willing  of  paying  a  gross  income  of  ten  times  that  amount,  or 
about  60%  of  the  actual  value  of  the  land  every  year  for  its  use 
in  connection  with  its  improvement  ! 

The  relation  which  the  investment  on  the  building  should  bear 
to  the  marketable  value  of  the  land  is  really  determinable  by 
the  expenditure  justified  by  the  prevailing  rate  of  rentals  for 
any  given  form  of  occupancy. 

When  the  value  of  the  site  combined  with  the  building  is  to  be 
established  from  known  or  assumed  rates  of  rental,  the  follow- 
ing method  will  afford  the  means  of  determining  the  established 
value  at  any  desired  rate  of  interest  : 


loox  i 
28 


Appreciation  of  Value  of  Land 


S  ==  rate  of  rental  per  square  foot  occupied  or  rentable  area. 

u  =  per  cent,  of  net  rentable  area  to  gross  area  of  building. 

r  —  ratio  of  net  income  to  total  income. 

/  =  number  of  stories  in  the  building. 

i  =  rate  of  interest,  per  cent,  per  annum. 

b  =  area  of  the  building  in  square  feet. 

T  =  total  invested  value  of  site  and  building. 

From  the  result  of  such  a  computation  the  actual  cost  of  the 
building  may  be  deducted,  when  the  value  established  for  the 
site  remains.  If  this  value  be  largely  above  the  existing  mar- 
ketable value,  then  too  great  an  investment  in  building  has  been 
assumed  to  be  made,  a  result  which  may  be  exemplified  by  the 
following  examples  of  the  application  of  this  method  to  a  com- 
parison of  values. 

EXAMPLE  I: 

It  is  proposed  to  erect  either  (i)  an  8-story  or  (2)  a 
12-story  housekeeping  apartment-house  upon  a  certain  plot, 
the  rentals  in  which  will  be  $1500  per  annum  for  a  suite  of 
1120  square  feet,  or  an  average  of  $1.34  per  square  foot 
per  annum.  What  will  a  net  return  of  5  %  per  annum  jus- 
tify for  the  value  of  the  land  plus  the  cost  of  the  building? 

S  =  rate  of  rental $i-34 

n  =  ratio  of  net  rentable  area  to  gross  building  area    60% 
r  =  ratio  of  net  income  to  total  income,  with  allow- 
ance for  10%  vacancies,  or 35% 

/=  (i)  8  stories,  (2)  12  stories. 

i=  interest     - 5% 

Then,  substituting  for  the  nomenclature  in  the  formula,  we 
obtain  for  T,  or  the  total  investment  on  which  the  returns  would 
pay  interest : 


29 


Building  for  Profit 


/•     X     ~i  1.34x60x3^x8  (K  r  r 

(1)  ;r==-^£!  =$45.02   per   square   foot  of 

100  x  z  ,     ., ,. 

building  area. 

,    ™       1.34x60x35x12      <,.,.  r          r 

(2)  7  :  =$67.50  per  square  foot  of 

building  area. 

Assuming  the  proposed  structure  to  be  erected  upon  a  plot, 
say,  75  feet  by  100  feet,  of  which  the  building  occupies  80%,  the 
area  of  the  building  will  be  6000  square  feet. 

(1)  Then  the  8-story  building  would  justify  a 
total  investment  of  $45  x  6000  square  feet, 

or $270,000 

(2)  The  12-story  building  would  justify  a  total 
investment  of  $67.50  x  6000  square  feet,  or  $405,000 

These,  then,  are  the  total  values  established  by  the  respective 
buildings  in  the  land  and  the  structure. 

The  cost  of  an  8-story  building  may  be  estimated  at  30  cents 
per  cubic  foot  and  its  height  at  96  feet,  so  that  the  total  cost 

would  be $172,800 

This  cost  would  then  establish  the  value  of  the  land  at     $97,200 

out  of  a  total  investment  of $270,000 

The  cost  of  a  1 2-story  building  taken  at  36  cents  per 

cubic  foot  and  a  height  of  144  feet  would  be      ...  $31 1,000 

which  would  establish  the  value  of  the  land  at.  .     .     .     $94,000 

with  a  total  investment  of $405,000 

There  would  thus  be  no  advantage  in  the  erection  of  the  12- 
story  building. 

Let  it  be  assumed,  however,  that  the  larger  building  might  be 
built  for  33  cents,  or  a  difference  in  cost  of  only  3  cents,  per 
cubic  foot,  in  which  case  it  would  cost  only  ....  $288,000 

This  would  leave  for  the  land  value $117,000 

or  an  apparent  advantage  in  favor  of  the  1 2-story 

building  of $20,000 

30 


"Over-investment  involves  an  additional  pledge  on  the  part  of  the  land 

to  maintain  its  attractiveness  as  a  site,  and  of  the  building 

to  continue  to  fulfil  its  original  purpose" 


Appreciation  of  Value  of  Land 


It  is  noticeable,  however,  that  in  order  to  secure  this  addition 

to  the  invested  value  of  the  land  of $20,000 

an  increased  investment  in  the  building  has  had  to  be 

made  of $105,200 

and  the  depreciation  upon  this  increased  cost  at  thirty 
years'  life  at  5%  compound  interest  would  be  1.5%  on 

difference  in  cost,  or $1,578 

which  would  use  up  more  of  the  returns  than  would  pay  the 
interest  of  $1000  upon  the  additional  value  established  for  the 
land. 

Therefore,  these  results  show  that  a  1 2-story  building  would 
not  be  a  really  remunerative  investment  as  compared  with  the 
more  moderate  expenditure  upon  the  8-story  building,  at  even 
so  small  a  difference  in  cost  as  3  cents  per  cubic  foot. 

EXAMPLE  II : 

It  is  proposed  to  erect  (i)  a  1 2-story  or  (2)  a  2o-story 
building  for  office  purposes  on  a  certain  plot,  the  prevail- 
ing rate  of  rentals  in  the  surrounding  vicinity  being  an 
average  of  $1.75  per  square  foot  net  rentable  area;  invest- 
ment at  4%  ;  building  area,  say,  5000  square  feet. 

5  =  rate  of  rental $1.75 

n  =  ratio  of  net  rentable  area  to  gross  building 

area,  say 65.,% 

r  =  ratio  of  net  income  to  total  income,  with  allow- 
ance for  10%  vacancies,  or 45% 

/=  (i)  12  stories,  (2)  20  stories. 

i  =  interest .      4% 

Then 

( i )  T  =  ^75  *  65x45x12  =  $I5    6o  e  foot  of 

TOO  V   A 

the  building. 


Building  for  Profit 


Therefore,  5000  square  feet  x  $153.60  =  say,  total  invest- 
ment of $768,000 

or 

/    \    T       1.75x65x45x20      <>  „/-  r          r  ,1 

(2)    /=-  =9256  per  square  foot  01  the 

building. 

Therefore,  5000  square  feet  x  $256  =  total  investment  of 

$1,280,000 
12  stories,  cost  37  cents  x  144  x  5000  =  $266,400,  leaving  a 

land  value  of $501,600 

20  stories,  cost  54  cents  x  240  x  5000  —  $648,000,  leaving  a 

land  value  of $632,000 

Increased  apparent  value  of  land  by  2O-story  building  is 

$130,400 
But  increased  investment  in  building  is      .     .     .  $381,600 

Income  on  $130,400  at  4%  is $5, 216 

But  loss  by  depreciation  on  excess  cost  of  building  is,  at 
4%  compound  interest  on  30  years'  life  ....  $6,792 
Therefore  the  1 2-story  building  is  the  better  investment 

by $1,576  per  annum 

at  a  difference  in  construction  cost  of  //  cents  per  cubic  foot. 
And  should  the  difference  be  reduced  to  14  cents  per  cubic 
foot,  then  the  two  proposals  would  stand  on  an  equality  as 
regards  net  rate  of  returns;  but  the  larger  investment 
would  still  load  the  land  unnecessarily. 

Such  unnecessary  expenditures,  while  they  may  be  and  are 
assumed  to  be  remunerative  to  the  extent  of  a  return  of  annual 
interest,  are  speculative  risks  upon  the  ability  of  the  building  to 
maintain  them.  As  has  been  previously  remarked,  over-invest- 
ment of  any  kind  involves  an  additional  pledge  on  the  part  of 
the  land  to  maintain  its  attractiveness  as  a  site,  and  of  the  build- 
ing to  continue  to  fulfil  its  original  purpose  for  the  full  term 

Assuming  an  increase  of  60%  in  the  cost  of  building  construction  and  a  rise  in  the 
prevailing  rate  of  interest  to  7'fi ,  it  will  he  found  that  the  rentals  assumed  in 
these  illustrations  are  practically  doubled.  But  by  such  an  advance  in  rental  the 
value  of  the  site  has  not  been  affected. 

32 


Appreciation  of  Value  of  Land 


of  a  period  in  which  its  value  shall  be  offset  by  the  land  appre- 
ciation or  by  a  fund  out  of  net  earnings. 

If  either  pledge  should  fail,  as  in  the  recent  instance  of  a  17- 
story  office  building,  then  the  property  suffers  by  the  premature 
removal  of  the  too  costly  structure,  which  has  really  hastened 
its  own  demise,  while  the  failure  or  even  the  over-success  of  a 
more  moderately  proportioned  building,  which  might  bring 
about  its  removal  in  the  same  time,  would  do  so  with  a  justifiable 
and  reasonable  loss. 

The  erection  of  steel-framed  buildings  of  one  particular 
height  cannot  fit  in  with  all  values  of  the  sites  they  occupy, 
especially  on  narrow  plots  in  side  streets,  where  great  depen- 
dence must  naturally  be  placed  on  the  temporary  conditions 
obtaining  prior  to  similar  improvements  of  contiguous  prop- 
erties. Some  of  the  tall,  narrow  buildings  thus  located  are  of 
the  nature  of  excess  investments,  or  are  indications  of  too  great 
an  expenditure  in  the  site.  Such  buildings,  while  they  tem- 
porarily enjoy  superior  benefits  of  light  and  air,  derived  from 
their  location  among  smaller  neighbors,  are  bound  to  lose  much 
of  this  advantage  later,  but  anticipation  of  this  contingency  is 
very  commonly  ignored  or  subordinated  to  the  demand  for  re- 
turns on  all  the  area  possibly  to  be  crowded  on  to  the  site. 

It  is  an  open  question  whether  a  large  variety  of  buildings 
would  not  gain  by  a  substantial  reduction  of  their  floor  areas, 
whereby  an  increase  of  the  access  of  light  and  air  to  their  in- 
teriors may  be  secured. 

There  is  a  special  value  to  be  attached  in  certain  cases,  for 
mere  advertising  purposes,  to  those  spaces  in  a  building  which 
front  on  a  street,  which  advantage  is  not  possessed  by  rear 
spaces ;  but  the  main  asset  of  street  frontage  is  light  and  air,  for 
which  additional  rentals  are  obtainable. 

Direct  and  abundant  light  and  access  to  wide  unoccupied 
space  increase  the  rentable  value  of  any  part  of  commercial 

33 


Building  for  Profit 


buildings,  over  any  other  part  not  equally  advantaged.  Those 
portions  in  a  building  which  are  more  or  less  deprived  of  air 
and  light  make  so  low  a  return  as  to  become  unremunerative, 
constituting  a  mere  burden  on  the  building,  reducing  its  average 
of  rentals.  Mr.  F.  H.  Heywood  has  recently  stated,  as  a  result 
of  wide  investigation,  that  the  value  of  court  offices  decreases 
10%  per  floor  from  the  rental  of  the  floor  at  the  top  of  the  court. 

Equal  expense  is,  however,  involved  in  the  construction  of 
each  part  of  the  structure,  and  if  this  feature  be  carefully  con- 
sidered at  the  outset,  it  may  be  found  that  some  large  proportion 
of  the  building  could  be  omitted  with  advantage,  reducing  the 
total  cost  of  the  building,  and  raising  the  rentals  of  the  rear  or 
poorly  lighted  parts  by  affording  space  for  light  and  air,  ap- 
proximating that  of  the  most  open  or  best-lighted  space,  such 
as  the  street  frontage.  It  is  better  to  have  a  small  building 
all  of  which  produces  a  high  rate  of  rental  than  a  large  building 
rented  at  high  rates  in  front  and  low  rates  at  rear,  averaging 
the  same  as  the  smaller  building. 

The  following  illustration,  based  on  a  scale  of  100  parts, 
brings  out  this  consideration. 


Exam- 
pie 

Lot 

BTd- 
ing 

Cost 

Occu- 
pied 
area 

Net 
area 

Rent 
front 

Rent 
rear 

Aver- 
age 
rent 

Total 
in- 
come 

Exp. 

Re- 
turn 

Interest 
on  cost 

A 

IOO 

80 

800 

80% 

64 

I.25 

0-75 

I  .  OO 

64 

50% 

32 

4% 

B 

IOO 

60 

600 

80% 

48 

*.«5 

!-25 

!.25 

60 

50% 

3° 

5% 

34 


TfTrri iJTl //TLTfiiil 


«r  o 

<u  >-i 


£  be 

O     C 


5  c 


—  rt 

o  & 

ij  c« 

<L»  <L» 

—  (/I 

J5  C 

rt  js 


:- 


Ill 

VALUES  ESTABLISHED  BY  BUILDINGS 

THE  foregoing  considerations  have  shown  that  the  effi- 
cient existence  of  a  building  must  be  measured  and  may 
be  limited  by  its  capability  to  make  a  reasonable  return 
upon  the  original  investment,  and  have  indicated  that  the  result 
should  be  accomplished  in  addition  to  maintaining  or  building 
up  a  fund  sufficient  for  its  own  reconstruction  at  some  future 
period.  A  building  which,  under  these  conditions,  does  not 
make  a  net  return  equal  to  current  market  rates  for  thoroughly 
sound  investments  cannot  be  considered  a  satisfactory  equiva- 
lent for  investment  in  other  forms  of  security,  and  the  extent 
of  its  failure  in  the  return  must  be  charged  against  any  assuma- 
ble  appreciation  of  the  value  of  the  site  on  which  it  stands,  and 
may  be  regarded  as  an  index  of  a  shortened  term  for  its  exis- 
tence. 

In  determining  the  extent  of  expenditure  which  is  justifiable 
in  the  improvement  of  real  estate,  as  has  been  done  herein,  use 
has  been  made  of  a  percentage  of  the  gross  rentals  as  a  basis  for 
the  financial  return  which  commercial  buildings  may  be  expected 
to  make  in  order  to  establish  certain  capitalized  values  in  the 
site  and  a  commensurate  return  upon  their  own  cost. 

This  return  is  the  result  of  two  elements— the  rentable  value 
of  a  square  foot  of  space  prevailing  in  that  locality  for  any 
specific  class  of  occupancy,  and  the  proportion  of  expenses  for 
the  operation  of  the  building  and  for  the  payment  of  fixed 
charges  thereon. 

Rates  of  rentals  do  no  .doubt  vary  with  locality  and  differ 

35 


Building  for  Profit 


from  those  which  at  present  prevail  in  New  York  City,  as 
shown  in  table  A.  But  the  ratio  of  the  expenses  to  the  rentals 
may  be  expected  to  remain  similar  for  any  specific  type  of  build- 
ing and  character  of  operation. 

A  prevailing  rate  is  not  always  to  be  enhanced  or  beneficially 
affected  by  inducements  such  as  elaborate  ornamentation  or  im- 
posing exterior  appearances  in  new  buildings,  nor  can  a  perma- 
nent dependence  be  placed  on  increased  rentals  obtainable  by 
reason  of  novelty  in  construction  or  even  by  internal  con- 
veniences. Even  the  one  definitely  valuable  asset  or  influence 
of  the  possession  of  ample  light  and  air  can  only  be  permanently 
secured  by  the  ownership  of  contiguous  property  or  exceptional 
surrounding  circumstances,  or  by  the  devotion  of  part  of  the 
site  to  this  purpose. 

It  is  unquestionable  that  certain  beneficial  effects  result  from 
dignified  appearance  in  buildings,  particularly  as  regards  their 
entrances;  and  reasonable  excess  expenditures  are  justified  in 
decorative  effects  which  may  be  attractive  to  prospective  tenants, 
but  such  matters  need  more  than  haphazard  consideration.  Im- 
posing and  elaborate  cornice  decoration  accompanies  gloomy 
recessed  court  entrances  of  some  recent  designs  of  apartment- 
houses,  and  these  and  other  expenditures  require  to  be  directed 
with  judgment. 

There  was  recently  published  an  account  of  a  business  build- 
ing on  the  street  front  of  which  were  erected  solid  columns  of 
selected  granite,  the  cost  of  each  amounting  to  $7500,  exclu- 
sive of  their  capitals  and  pedestals. 

Interest  upon  the  cost  of  these  features  would  involve  the 
entire  earning  capacity  of  one  floor  of  the  building,  which  may, 
therefore,  be  regarded  as  having  been  constructed  solely  for  the 
purpose  of  justifying  the  investment  upon  the  columns.  As  the 
cost  of  this  additional  floor  added  relatively  to  the  total  cost  of 
the  building,  the  whole  building  was  also  involved  to  some 

36 


Values  Established  by  Buildings 


extent  in  the  work  of  paying  interest  on  the  columns,  the  attrac- 
tiveness of  which  to  tenants  would  thus  have  to  be  very  sub- 
stantial to  justify  their  existence.  It  is  doubtful  whether  much 
dependence  can  be  placed  upon  the  future  value  of  elaborate 
exterior  decoration  or  expensive  interior  construction  such  as 
have  accompanied  the  erection  of  a  number  of  large  business 
buildings. 

In  the  case  of  office  buildings  it  is  to  be  noted  that  mortgage 
money  may  be  obtainable  thereon  at  rates  considerably  below 
those  current  for  other  classes  of  buildings,  and  that  the  interest 
return  upon  the  equities  may  be  acceptable  at  correspondingly 
moderate  rates.  If,  however,  the  return  upon  the  equity  does  not 
equal  or  exceed  the  rate  upon  which  the  mortgage  is  placed,  the 
building  could  not  be  considered  to  be  effectively  productive, 
because  the  investor  would  naturally  do  better  at  equal  rates 
by  investment  in  a  first  mortgage  or  a  bond  upon  the  property, 
thereby  obtaining  a  first  lien  upon  its  earnings,  with  entire 
freedom  from  all  responsibilities  and  anxieties  as  to  the  details 
of  operation. 

Figures  from  a  large  office  building  of  very  successful  char- 
acter, twenty  stories  in  height,  may  be  taken  as  an  illustration. 
With  an  invested  value  exceeding  $6,000,000  in  land  and  build- 
ing, the  gross  rentals  are  9.3%  of  the  capital  value,  and  the 
operating  cost  is  (without  provision  for  vacancies)  41.6%  of 
the  rentals.  This  cost  does  not  include  provision  for  depre- 
ciation of  the  building  or  of  its  equipment,  so  that  the  ostensible 
return  of  $.$%  upon  the  investment  will  be  reduced  by  allow- 
ance for  those  elements  to  a  rate  of  approximately  4%. 

For  so  important  a  building,  this  is  evidently  a  satisfactory 
result,  and  as  a  mortgage  is  placed  upon  the  building  at  that 
rate  of  interest,  the  equity  or  remainder  stands  upon  the  same 
basis  of  interest  as  the  mortgage.  But  it  is  to  be  noted  that 
while  the  interest  upon  the  mortgage  would  be  secured  as  a 

37 


Building  for  Profit 


prior  lien  upon  the  income,  the  remainder  or  equity  would  de- 
pend for  the  stability  of  its  revenue  upon  the  maintenance  of  the 
present  rates  of  rentals,  of  taxation,  and  of  other  elements  in- 
cluded in  the  cost  of  operation. 

Another  illustration  may  be  taken  from  the  results  afforded 
by  an  office  building  of  nearly  equal  size,  but  of  only  sixteen 
stories  height,  the  appraised  value  of  which,  with  its  site,  is 
$5,000,000.  The  rates  of  rental  in  this  building  are  not  nearly 
so  high  as  in  the  foregoing  instance,  and  so  the  proportion 
which  the  actual  rentals  bear  to  the  gross  value  is  only  7.7%. 

Out  of  the  income  there  is  set  aside  a  fund  for  depreciation, 
and  the  expenditures  are  economically  maintained  at  40%  of 
the  net  income,  partly  by  reason  of  the  simple  character  of  the 
equipment  and  the  absence  of  generating  machinery.  Under 
these  circumstances  its  return  of  4.7%  upon  the  invested  value 
makes  it  an  effectively  productive  investment,  as  a  mortgage  at 
the  same  rate  as  in  the  foregoing  instance  would  leave  an  attrac- 
tive return  upon  the  equity. 

An  instance  of  a  return  of  a  rate  less  than  current  mortgage 
interest  is  that  of  a  high-class  office  building,  twenty  stories 
high,  of  a  total  appraised  value  of  $4,500,000,  the  total  rentals 
of  which  are,  however,  only  7%  of  the  appraised  value.  This 
building  has  a  complete  power-generating  plant,  and  is  operated 
at  a  cost  of  48%  of  its  income,  returning  upon  its  capitalized 
value  only  3.6%  interest. 

A  smaller  modern  office  building  of  about  one  third  the  size 
of  the  foregoing,  of  fourteen  stories  height,  having  an  ap- 
praised value  of  $600,000,  brings  a  rental  of  10%  thereon,  and 
returns  a  net  interest  upon  the  investment  of  4.8%,  in  spite  of 
a  proportion  of  expenditure  to  income  of  very  nearly  5°%- 

A  still  smaller  building,  thirteen  stories  high,  about  one  fifth 
of  the  size  of  the  first  instances  above  referred  to,  of  an  ap- 
praised value  of  $500,000,  brings  in  a  rental  of  9%  thereon, 
and  returns  upon  the  investment  4.25%.  This  building  is  served 

38 


'It  is  an  open  question  whether  the  majority  of  city  buildings  would 

not  gain  by  a  substantial  reduction  of  the  ratio  of  the 

area  of  the  building  to  the  area  of  the  lot" 


Values  Established  by  Buildings 


by  public  supplies  of  power  and  heat,  and  is  operated  for  a  total 
proportion *of  47.5%  of  the  total  rentals. 

These  instances  appear  to  indicate  that  in  certain  cases  the 
relation  of  the  building  to  the  land,  both  as  regards  height  and 
as  regards  expense  of  construction,  has  not  been  happily  pro- 
portioned, and  thus  the  return  upon  the  total  invested  capital 
has  been  proportionately  reduced.  But  where  the  initial  cost 
has  been  moderate,  and  unnecessary  expenditures  in  construc- 
tion, in  equipment,  and  in  operation  have  been  avoided,  the  net 
returns  upon  such  investments,  while  they  may  be  less  than 
those  afforded  by  other  classes  of  buildings,  are  acceptable  to 
conservative  investors,  in  view  of  the  attractive  solidity  of  the 
investment. 

Passing  to  other  classes  of  buildings  of  which  similar  statis- 
tics are  available,  it  will  be  found  that  the  returns  are  somewhat 
more  irregular  than  in  the  case  of  office  or  business  buildings. 

Where  buildings  combine  simple  character,  moderate  cost  of 
construction,  and  moderate  extent  of  mechanical  service  with 
a  location  in  which  land  values  are  comparatively  low,  we  may 
expect  to  find  a  growing  advantage  as  regards  the  net  return 
upon  the  invested  value.  This  is  usually  the  case  with  loft 
buildings  of  simple  semi-fireproof  construction,  generally  situ- 
ated in  neighborhoods  off  the  main  arteries  of  traffic,  and 
equipped  with  very  simple  forms  of  conveniences.  In  such 
properties  the  gross  rentals  approach  one  tenth  of  invested 
values,  and,  with  expenditures  below  40%  of  rentals,  will  show 
returns  exceeding  5%. 

The  following  are  four  scattered  instances  with  varying  rates 
of  rental,  all  located  in  Manhattan : 

Rentals  per  square  foot  42  cents  5 1  cents  60  cents  70  cents 

Operating  expense    .     .  37%  39%  3^%  39% 

Rentals  of  value    .     .     .  8.5%  9%  9.8%  10% 

Returns  on  investment  .  5.4%  5-57%  6%  6.1% 

To  maintain  the  book  value  of  the  properties  cited,  at  a  rate  of  return  of  8%,  with 
operating  expense  not  exceeding  50%  of  gross  income,  the  rent  must  be  raised 
to  63  cents,  73  cents,  83  cents,  and  92  cents  respectively. 

39 


Building  for  Profit 


An  instance  which  differs  from  the  foregoing  is  the  follow- 
ing: 

Rent per  sq.  ft.  63  cents 

Operating-  expense 43% 

Rents  to  value,  only 7% 

Return  on  value,  only      .     .     .     .     .     .     4% 

The  invested  value  is  too  high  for  such  a  class  of  property, 
but  on  looking  into  details  we  find  the  cause  in  great  part  to  be 
that  the  building  is  overtaxed,  paying  20%  of  its  gross  rentals 
in  taxes.  If  this  expenditure  were  reduced  to  the  level  of  others 
in  a  similar  class  of  property,  say  14%,  the  return  would  be 
raised  to  4^/2%,  but  the  invested  value  might  still  be  scaled 
down  about  12%  to  make  a  return  of  $%. 

The  term  "loft  building"  has  been  extended  to  include  the 
modern  class  of  1 2-story  fireproof  building  occupied  chiefly  as 
warehouses,  show-rooms,  or  for  very  light  manufacturing  pur- 
poses. These  buildings  are  attractive  for  such  purposes,  by 
reason  of  their  superior  light,  generally  gained  by  their  location 
in  neighborhoods  occupied  by  buildings  of  a  few  stories;  an 
advantage  which  is  frequently  liable  to  be  discounted  by  the 
growth  of  neighboring  buildings  of  equal  height.  As  it  is,  they 
secure  rentals  on  a  somewhat  higher  scale,  and  having  the  same 
characteristic  of  moderate  cost  and  operation,  they  show  very 
gratifying  returns. 

A  recently  completed  building  of  this  order  is  leased  to  one 
tenant  at  a  rental  equivalent  to  nrr  of  invested  value,  and, 
with  operating  expense  of  40%,  will  show  a  return  of  6y2(  < 
on  the  investment. 

In  the  residential  class  of  building  we  find  a  set  of  conditions 
differing  from  both  of  the  other  classes  of  commercial  build- 
ings. 

An  overwhelming  tendency  has  brought  about  a  demand  for 

40 


Values  Established  by  Buildings 


apartments,  which  has  been  responded  to  by  an  almost  confus- 
ing variety  of  forms  of  structure.  In  certain  favored  localities 
a  fashionable  demand  has  forced  the  marketable  value  of  land 
upward,  and  in  others  the  mere  crowding  of  population  has 
effected  the  same  result.  The  class  of  building  erected  on  these 
sites  is,  however,  very  different,  in  the  one  case  being  an  expen- 
sive construction  with  expensive  accompaniments  of  operation, 
and  in  the  other  the  cheapest  class  of  construction  and  almost 
entire  absence  of  conveniences. 


VALUES  AND  EXPENDITURES  OF  TENEMENTS  OR  FLATS 

NEW  YORK  CITY 


Rent  per 

Rent  to 

Operating 

Return  on 

Location 

gross  sq.  ft. 

value 

expenses 

investment 

Remarks 

cents 

% 

% 

% 

6th  Street 

53-7 

9-55 

35-° 

6.  20 

Stores  and  cold  water 

Rivington  St. 

55-4 

10.  20 

38.0 

6.30 

Stores  and  hot  water 

26th  Street 

46.9 

9-55 

37-° 

6.01 

Hot  water 

7ist  Street 

33  .1 

9  .  oo 

35-5 

5.80 

Stores  and  hot  water 

88th  Street 

35-2 

9-3° 

36.0 

5-95 

Hot  water 

lOist  Street 

33-5 

9.40 

35-° 

6.  ii 

Stores  and  hot  water 

1  1  8th  Street 

42.7 

8-53 

43-° 

4.95 

Steam  heat  and  hot  water 

I35th  Street 

43  -o 

9.60 

42.8 

5-5° 

Steam  heat  and  hot  water 

i4Oth  Street 

42.5 

IO.  OO 

44-5 

5-55 

Steam  heat  and  hot  water 

Averages 



9-5° 

5.80 

At  the  lower  part  of  the  scale,  the  so-called  "cold-water" 
tenement  has  attracted  a  vast  number  of  small  investments,  on 
which  the  returns  have  been  attractively  high,  and  the  demand 
for  accommodation  so  great  as  to  insure  regularity  in  tenancies. 

The  relation  of  rentals  to  invested  values  is  generally  over 
9%,  and  the  operating  expenditures,  if  taxation  does  not  exceed 
12%  of  the  rentals,  are  about  36%,  making  returns  of  about 
6%.  The  convenience  of  hot-water  service  orfly  slightly  affects 

Large  advances  in  the  cost  of  operation  and  taxation  have  substantially  raised  the 
general  level  of  rentals  on  this  class  of  property.  Their  invested  value  will  not  be 
maintained  unless  the  rents  provide  for  a  higher  rate  of  return  upon  the  investment 
to  meet  prevailing  conditions  in  the  money  market. 

41 


Building  for  Profit 


this  return,  but  the  addition  of  steam  heat  makes  a  decided  re- 
duction. 

The  elevator  apartment-house  is  in  course  of  development, 
and  it  is  difficult  to  define  the  controlling  conditions  at  present, 
since  the  recent  course  has  been  one  of  over-production,  result- 
ing in  large  proportions  of  vacancies  and  reduction  of  rentals, 
and  an  appraisal  under  such  conditions  would  scale  down  their 
value. 

When  fully  occupied  and  divested  of  the  prevalent  concession 
of  free  rents,  such  properties  may  show  returns  upon  moderate 
values  of  land  exceeding  other  classes  of  buildings. 

RENTALS  IN  FASHIONABLE  APARTMENTS,  WEST  SIDE 

BOROUGH  OF  MANHATTAN 


Location 

Stories 

Ele- 
vators 

Rooms  persuite 

Rent  per  room 
per  month 

Rent  per  gross 
sq.  ft.  per 
annum 

93d  Street  

I  2 

3 

8  to  10 

$25-26 

8  1  cents 

io8th  Street    .... 

12 

3 

6  to     8 

16-23 

76        " 

n6th  Street    .... 

IO 

2 

7  to    8 

1  8-2  I 

74     " 

West  55th  Street      .     . 

I  I 

2 

8  to    8 

19-28 

73     " 

1  1  3th  Street    .... 

12 

3 

6  to    9 

16-18 

70     " 

i  nth  Street    .... 

8 

i 

3  to     7 

15-1-6 

69     " 

i3Oth  Street    .... 

6 

i 

4  to     7 

9-1  1 

46     •« 

The  annual  rentals  paid  for  residential  apartments  appear 
large,  but  when  reduced  to  the  basis  of  the  occupied  area 
they  present  a  very  moderate  comparison  with  the  rents  paid  in 
other  classes  of  buildings,  in  which  the  conveniences  included 
are  less  in  number  and  in  cost,  and  where  the  occupancy  of  the 
space  is  restricted  to  a  much  shorter  daily  period. 

Thus  a  fashionable  apartment-house  renting  suites  of  eight 
rooms  at  $2000  to  $2500  per  annum  is  bringing  in  an  average  of 
less  than  75  cents  per  square  foot  of  building  per  annum,  or 

See  additional  observations  on  residential  properties 
in  Chapter  VIII,  p.  119. 

42 


"Reasonable  excess  expenditures  are  justified  in  decorative  effects 
which  may  be  attractive  to  prospective  tenants" 


Values  Established  by  Buildings 


about  the  same  rate  as  that  of  a  high-class  loft,  and  much  less 
than  the  lowest  rate  for  an  office  building.  Rentals  of  older 
apartment  buildings  located  in  the  immediate  vicinity  of  lower 
Fifth  Avenue  are  found  to  vary  from  72  to  Si  cents  per  square 
foot  per  annum,  and  the  higher  rate  is  paid  on  the  same  street 
and  block  as  the  lower. 

The  six-story  elevator  apartment  on  the  upper  West  Side, 
with  modern  conveniences,  rents  for  rates  less  than  50  cents 
per  square  foot,  which  is  less  than  the  rent  paid  on  the  lower 
East  Side  for  space  in  a  "cold-water"  tenement. 

Such  diverse  figures  are  only  apparently  contradictory,  as  the 
rents  are  really  controlled  by  the  value  of  the  land,  for  residence 
upon  which  the  tenant  is  paying,  and  which  is  therefore  the 
element  fixing  the  rate  of  rental. 

The  square  foot  of  high-class  apartment  building,  burdened 
though  it  be  with  additional  costs  of  construction  and  of  opera- 
tion, is  located  on  land  of  less  present  value,  and  the  total  in- 
vestment per  square  foot  is  therefore  less  than  in  the  cheaper 
building  on  land  of  high  value. 

Operating  expenses  of  such  buildings  are  relatively  high, 
especially  where  electric  lighting  and  refrigerating  services  are 
afforded  gratuitously.  Without  this  accompaniment,  the  aver- 
age proportion,  when  taxation  does  not  exceed  13%  of  rentals, 
would  be  near  51  c/c,  and  with  lighting  and  refrigeration  added, 
about  65%. 

Rentals  being  approximately  13  or  14%  of  invested  values, 
the  return  may  be  6l/2  to  j%  ;  and  as  mortgages  upon  such  prop- 
erties are  commonly  based  upon  interest  rates  of  5  to  $y&%,  the 
net  returns  upon  the  equities,  while  showing  considerable  vari- 
ation due  to  the  irregularities  of  occupancy  and  expenditures, 
are  attractive. 

All  these  instances  lead  naturally  to  the  conclusion  that  the 
true  values  of  improved  properties  are  those  at  which  the  inter- 
When  rates  of  interest  on  good  investments  exceed  7  to  8%  the  present  scale  of 
expense,  taxes,  and  interest  on  mortgage  money  require  the  gross  income  from 
modern  flats,  "walk-up,"  and  elevator  apartments  to  be  18  to  20%  of  the  market- 
able value. 

43 


Building  for  Profit 


est  returned  by  the  building  will  equal  or  somewhat  surpass  that 
of  a  mortgage  or  bond  issue  upon  similar  property. 

If  a  higher  appraised  value  is  to  be  maintained,  some  appre- 
ciation of  the  value  of  the  land  must  be  annually  assumed  to 
exist  to  the  credit  of  the  equity,  and  the  amount  of  such  appre- 
ciation must  equal  the  difference  between  the  real  return  and  the 
market  return,  but  it  is  evident  that  such  a  method  would  be  prob- 
lematic and  indefinite.  The  appraised  value  not  infrequently 
represents  actual  outlay  on  the  property,  and  in  the  cases  above 
cited  is  not  in  excess  of  commonly  accepted  appraisals  based 
upon  the  gross  incomes. 

As  an  instance  may  be  cited  the  recent  purchase  of  a  fine 
modern  business  building  on  Fifth  Avenue,  bought  specifically 
for  investment  purposes  at  a  price  nearly  eleven  times  the  rate 
of  its  present  earning  capacity. 

It  is  clear,  therefore,  that  a  direct  relation  exists  between  the 
earnings  of  any  building  as  reduced  by  its  expenditures,  and  the 
capitalized  values  of  the  land  and  the  building  upon  which  inter- 
est is  paid  by  those  earnings,  so  that  where  the  relation  of  ex- 
penditure to  income  is  known  or  may  be  reasonably  estimated, 
the  relative  capitalized  value  of  the  property  may  be  readily 
established.  Relations  so  established  are  shown  in  a  convenient 
form  in  the  accompanying  diagram,  Fig.  9,  at  rates  of  interest 
varying  from  3  to  6%.  In  this  diagram  the  horizontal  scale  is 
that  of  the  expenditures  out  of  the  total  income,  and  the  vertical 
scale  is  that  of  capital  value  per  $1000  of  gross  income. 

Reading  up  from  any  point  of  relation  or  percentage  of  ex- 
penditures to  the  diagonal  line  of  desired  rate  of  interest,  the 
horizontal  line  to  the  right  gives  the  capital  value  thus  estab- 
lished. 

Or,  reading  from  any  assumed  invested  value  to  its  intersec- 
tion with  the  desired  rate  of  interest,  a  vertical  line  from  that 
point  will  show  the  percentage  of  gross  income  within  which  all 
expenditures,  other  than  interest,  must  be  limited. 

44 


Values  Established  by  Buildings 


FIG.  9 


3.5  — 


4- 
4.5- 

5- 

5.5- 

6  Y 


7 


70          65          60          55          50         45          40          35 
Expenditures  in  Percentages  of  Gross  Income 


22  000 


21  000 
20000 
19000 
18000 
17000 
16000 


1  5  000     g 
C/3 

14000     | 
0 


1  3  000 


o> 


1  2  000  o 
o 
o 
o 

1  1  000       . 


O 


10000 


9000 


6000 


5000 


CAPITALIZED  VALUE 

This  diagram  can  be  utilized  for  higher  rates  of  interest  by  proportionate 
division;  thus  at  7%  interest  the  results  are  on£  half  those  shown  at  3l/2%. 

45 


Building  for  Profit 


EXAMPLE: 

Building  with  rents  of  $52,000. 

Operating  expenditures,  say  40%.     At  rate  of  4%   this 

gives  $15,000  per  $1000  of  income. 

15,000x52  equals  $780,000  as  the  established  value  of  the 

property  on  a  4%  basis. 

Further  dissection  of  the  matter  will  bring  out  the  point  that 
a  certain  proportion  of  operating  expense  to  income  may  be 
expected  under  present  conditions  in  certain  classes  of  buildings, 
so  that  the  prospective  investor  or  constructor  of  a  building  may 
decide  what  extent  of  expenditure  upon  a  building  would  be 
warranted  upon  a  certain  capital  value  of  the  land,  provided  that 
it  also  be  known  what  class  of  building  is  proposed  and  what 
prevailing  rentals  are  to  be  competed  with.  This  introduces  the 
subject  of  the  average  rate  of  rentals  corresponding  to  various 
classes  of  buildings,  and  an  examination  of  a  number  of  in- 
stances in  Manhattan  shows,  as  no  doubt  must  be  the  case  else- 
where, that  a  graduated  scale  of  rentals  ranges  between  defined 
figures  of  minimum  and  maximum  rates  over  the  different 
grades  of  each  distinct  class  of  building,  viz.,  the  business,  the 
warehouse,  and  the  apartment. 

A  number  of  observations  taken  from  existing  Manhattan 
conditions  are  averaged  and  tabulated  in  Table  A.  In  this  table 
the  rentals  are  stated  on  the  basis  of  a  square  foot  of  the  gross 
area  of  the  building,  and  are  also  given  on  the  basis  of  a  cubic 
foot  of  gross  contents  of  the  building,  in  order  that  a  direct  com- 
parison may  be  made  between  the  cost  and  the  rentable  values 
of  buildings.  It  will  not  be  difficult  from  these  or  parallel  statis- 
tics elsewhere  to  estimate  the  total  returns  likely  to  be  obtained 
from  a  building  of  a  certain  class  and  of  any  given  number  of 
stories. 

Analysis  of  these  figures  brings  out  some  interesting  features 


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construc'n  cost  in  % 

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47 


Building  for  Profit 


bearing  upon  the  nature  of  the  earning  capacity  of  the  several 
classes  of  buildings.  The  ratio  of  income  to  cost  of  building  is 
highest  in  the  case  of  office  buildings  of  moderate  height,  and 
decreases  with  height  in  excess  of  twelve  stories.  The  ratio  is 
much  higher  in  the  case  of  lofts  and  warehouses  than  in  the  case 
of  apartments.  The  land  value  in  each  case  varies  and  really 
follows  these  returns. 

It  will  also  be  noticed  how  the  rate  of  rental  follows  the  height 
of  the  building,  indicating  the  necessity  for  higher  rentals  in 
those  buildings  which  are  combined  with  high  ground  values. 

This  is  a  natural  outcome  of  an  increase  in  the  number  of 
floors,  which  involves  greater  relative  cost  of  construction  of  the 
whole  building,  and  greater  relative  expenditures  in  operation. 

At  any  rate  of  rental,  repetitions  of  the  site  or  additional 
floors  can,  by  metal  frame  construction,  be  carried  to  a  height 
where  the  interest  on  the  cost  of  construction  and  the  cost  of 
operation  would  absorb  all  the  return  and  leave  nothing  to  sup- 
port the  value  of  the  land. 

The  rate  of  rental  must  therefore  to  a  certain  extent  follow 
the  height  of  the  building.  If  tenants  are  willing  to  pay  higher 
prices  for  accommodations  a  certain  distance  vertically  from  a 
desirable  center,  rather  than  for  equal  accommodations  in  some 
other  building  at  an  equal  horizontal  distance,  the  upper  levels 
of  sky-scrapers  may  show  a  profit,  and  the  process  may  be  ex- 
tended to  the  construction  of  towers  without  limit  as  to  height. 

Unless  higher  rental  be  paid,  however,  excessive  height  consti- 
tutes a  burden  on  the  returns  from  the  lower  part  of  the  build- 
ing. Thus  towers  may  form  part  of  a  larger  and  lower  build- 
ing, returns  from  which  may  cover  the  deficiency  resulting  from 
the  tower,  and  make  it  an  apparent  financial  success. 

In  these  average  rentals  it  may  be  assumed  that  the  ground- 
floor  rents  raise  the  general  average. 

In  a  building  on  a  commercial  thoroughfare,  the  ground  floor, 

48 


Values  Established  by  Buildings 


with  the  use  of  the  basement,  will  usually  bring  in,  for  business 
purposes,  the  highest  rate  of  rental.  This  rental  being  aver- 
aged over  the  whole  rented  area,  it  follows  that  the  higher  the 
building  the  less  wrill  be  the  influence  upon  the  average  of  the 
rate  of  the  ground  floor  and  basement. 

Thus  in  a  six-story  building,  the  ground  floor  being  rented  at 
$4  and  the  upper  floors  at  $i  gives  an  average  of  $1.50  per 
square  foot.  But  if  the  building  be  twelve  stories,  rented  on 
upper  floors  at  the  same  rate,  then,  to  bring  the  average  to  the 
same  amount,  the  ground  floor  must  be  assumed  to  be  rented  at 
$7.50  per  square  foot,  otherwise  the  general  average  will  be  but 
$1.33  per  square  foot. 

Basements  with  direct  access  from  the  street  are  of  course  of 
greater  value  than  those  which  are  suited  only  to  serve  as  an 
adjunct  to  the  ground  floor. 

The  recent  large  advances  in  rentals,  even  if  they  should 
prove  to  be  permanent,  cannot  be  assumed  to  have  increased 
the  book  value  of  properties  unless  they  return  a  net  income 
upon  the  original  book  or  invested  value  at  a  prevailing  rate 
of  interest.  Nor  is  it  to  be  assumed  that  the  increased  cost  of 
new  building  construction  has  advanced  the  value  of  existing 
buildings,  particularly  as  construction  costs  are  not  fixed. 


49 


IV 
DEPRECIATION  OF  THE  VALUE  OF  BUILDINGS 

I.  PHYSICAL  DETERIORATION 

DEPRECIATION  of  the  value  of  modern  buildings  is  a  sub- 
ject on  which  opinions  very  divergent  in  character  are 
frequently  expressed,  and  appear  to  be  based  upon  no 
definite  method  or  system. 

Such  uncertainty  might  be  expected,  in  view  of  the  long-con- 
tinued existence  of  certain  buildings  which  are  within  the  know- 
ledge of  every  one,  some  of  which  are  even  to  be  found  in  our 
own  country  with  a  recorded  history  of  over  two  centuries  and 
which  are  still  able  to  afford  some  degree  of  usefulness  to  their 
occupants.  Such  instances  naturally  tend  to  the  conclusion  that 
if  equally  excellent  methods  and  solid  materials  be  employed  in 
modern  structures,  with  an  equal  degree  of  care  during  their 
existence  and  occupation,  at  least  an  equal  term  of  physical 
existence  might  be  expected,  and  that  therefore  the  anticipation 
of  any  depreciation  may  be  dismissed  as  being  too  remote  a 
prospect  for  necessary  consideration  or  for  any  financial  pro- 
vision. 

The  opposite  point  of  view  is  that  of  those  who  are  influ- 
enced by  the  short  term  of  existence  of  many  modern  buildings 
under  metropolitan  conditions,  resulting  from  rapid  changes  of 
circumstances  and  surroundings,  and  in  certain  cases  from  poor 
character  of  design  or  construction,  all  of  which  are  undoubt- 
edly contributory  causes  to  the  shortened  existence  of  many 
buildings. 

50 


V 

O/) 


o  ' 


Depreciation  of  the  Value  of  Buildings 


This  diversity  of  outlook  naturally  results  in  the  wide  diver- 
gence of  opinion  on  the  general  subject  to  which  reference  has 
been  made,  but  on  a  closer  investigation  of  the  matter  it  would 
seem  that  the  main  considerations  of  both  points  of  view  may  be 
brought  into  agreement. 

Depreciation  is  a  result  of  one  or  two  causes:  either  a  fall- 
ing-off  in  the  effectiveness  of  the  structure  in  fulfilling  the  pur- 
pose of  its  existence,  or  a  decay  in  its  physical  constitution. 
Strictly  speaking,  the  result  of  the  former  cause  is  more  prop- 
erly to  be  described  as  depreciation,  and  that  of  the  latter  would 
be  better  regarded  as  deterioration ;  but  as  common  practice  has 
applied  the  same  term  to  the  result  of  financial  as  well  as  ma- 
terial decay,  they  may  be  defined  respectively  as  economic  and 
physical  depreciation. 

The  two  elements  are  admittedly  interrelated,  yet  may  better 
be  understood  if  considered  separately. 

Economic  depreciation  is  shown  very  definitely  in  commercial 
buildings  by  reduction  in  earnings,  by  inadequacy  for  designed 
duty,  or  by  inadaptability  to  the  progress  of  requirements. 

The  prospect  of  economic  decline  may  lack  sufficient  definite- 
ness  to  impel  the  owner  of  a  building  to  make  provision  in  an- 
ticipation of  such  a  result,  but  the  effects  of  physical  decay  are 
defined  causes  for  the  eventual  disappearance  of  value. 

Physical  decay  may  always  be  expected  to  combine  with  ex- 
terior circumstances  to  aid  in  the  process  of  financial  decay, 
since  age  is  in  itself  a  bar  to  complete  desirability  and  full  effec- 
tiveness, and  a  building  though  in  excellent  condition,  if  it  be 
out  of  fashion,  out  of  date,  antiquated,  or  insignificant,  is  just  as 
liable  to  fall  behind  in  the  race,  or  to  be  neglected  in  favor  of 
younger  rivals,  as  the  still  vigorous  man  or  woman  similarly 
circumstanced. 

Age  is  inevitable,  and  its  effects  are  progressive  in  all  ma- 
terials, especially  in  combinations  of  materials  or  of  appliances. 


Building  for  Profit 


The  effects  of  age  are  always  in  the  direction  of  depreciation, 
and  are  only  stayed  or  discounted  by  more  or  less  radical  recon- 
struction or  remodeling. 

The  current  attentions  included  under  the  often  misplaced 
and  much  misunderstood  terms  of  maintenance,  upkeep,  and 
repair  are  necessary  accompaniments  of  the  course  of  existence 
of  all  building  materials  and  mechanical  appliances,  without 
which  the  advance  of  depreciation  would  be  hastened  and  de- 
crepitude would  be  precipitated. 

Maintenance  is  a  process  of  continuous  attention  to,  and  sup- 
ply of,  operating  necessaries,  including  solicitous  observation 
of  the  condition  of  the  object  cared  for,  and  corresponding  to 
the  protection,  shelter,  clothing,  and  food  supplied  to  living 
beings  in  order  to  maintain  their  functions  in  operating  con- 
dition. 

Upkeep  is  a  course  of  partial  re-creation  involving  expendi- 
ture of  time  and  money  in  anticipating  causes  of  decay,  of 
failure,  or  of  possible  injury  to  the  object  under  care,  corre- 
sponding to  the  hygienic  and  recreative  methods,  often  involv- 
ing considerable  expenditures  without  apparent  direct  results, 
which  are  or  should  be  followed  in  safeguarding  the  general 
health  and  strength  of  living  beings. 

Repair  is  the  course  of  partial  reconstruction,  replacement, 
or  renewal  of  \vorn  or  injured  portions  after  the  necessity  there- 
for becomes  apparent,  and,  unless  brought  about  by  accident, 
the  need  for  the  process  is  due  to  the  failure  or  inability  of 
maintenance  and  of  upkeep  wholly  to  arrest  the  progress  of 
decay. 

Deterioration  is  the  physical  result  of  the  natural  insufficiency 
of  the  foregoing  processes  of  maintenance,  upkeep,  and  repair, 
all  of  which  are  dependent  on  human  agencies,  wholly  to  fore- 
stall the  effects  of  wear  and  tear,  of  age,  decay,  or  accident. 

Depreciation  is  the  financial  result  of  the  combined  effects  in 

52 


Depreciation  of  the  Value  of  Buildings 


a  monetary  sense  of  all  the  foregoing,  although  it  may  be,  as 
hereinbefore  explained,  brought  about  by  exterior  causes,  just 
as  the  health,  the  vigor,  and  the  energy  of  a  man  may  be  dis- 
counted or  rendered  inoperative  by  circumstances. 

However  carefully  conducted,  the  processes  of  mainte- 
nance, upkeep,  and  repair  do  not  do  more  than  assist  the  object 
along  toward  the  eventual  period  of  obsolescence,  by  avoiding 
breakdown  on  the  wray,  or  evading  premature  failure  of  any 
part. 

But  the  arrival  of  that  condition  is  inevitable  when  the  object 
or  combination  of  objects,  its  various  parts  from  time  to  time 
repaired,  replaced,  rebuilt,  or  remodeled,  becomes  more  or  less 
a  combination  of  new  and  original  materials,  containing  a  num- 
ber of  minor  elements  of  weakness,  as  a  garment  ever  so 
efficiently  yet  frequently  darned,  mended,  or  patched  finally  be- 
comes useless,  though  much  of  its  original  material  may  remain 
in  excellent  usable  condition. 

In  such  condition  the  constitution  of  the  building  cannot  be 
expected  to  withstand,  any  more  than  can  that  of  a  man  or  a 
garment,  the  stress  of  existence  in  the  same  manner  as  when  it 
commenced  its  career. 

Therefore  we  may  frequently  find,  in  the  arrival  of  a  certain 
extent  of  physical  deterioration,  the  direct  cause  of  financial 
depreciation,  and  by  analyzing  the  former  may  be  able  to  define 
or  confirm  a  proper  period  of  provision  for  both. 

The  determination  of  a  rate  of  physical  depreciation  has 
occupied  the  attention  of  many  owners  of  property,  and  is  com- 
monly dealt  with  by  some  empirical  allowance,  such  as  is  repre- 
sented by  a  flat  annual  allowance  of  a  certain  percentage  of,  or 
deduction  from,  the  original  value.  Such  a  percentage  may  or 
may  not  be  correct.  The  physical  aging  of  a  building  depends 
upon  the  excellence  of  its  original  construction,  just  as  much  as 
the  substantial  health,  or,  as  we  call  it,  trie  "constitution,"  of  a 

This  subject  has  taken  on  a  new  and  insistent  character  since  the  establishment  of 
the  income  tax.  Depreciation  and  obsolescence  are  officially  recognized  and  are 
allowed  to  be  considered  in  the  computation  of  income  tax.  Additional  observa- 
tions on  the  subject  of  obsolescence  are  to  be  found  in  "Power  for  Profit," 
pages  142-5. 

53 


Building  for  Profit 


man  may  enable  him  to  postpone  to  a  certain  extent  the  effects 
of  the  progress  of  age. 

A  building  is,  however,  a  composite  structure,  all  the  elements 
in  which  are  not  of  the  same  character  and  do  not  possess  the 
same  age-resisting  quality.  Inert  materials,  such  as  brick, 
terra-cotta,  and  concrete,  are  of  a  longer-lived  character  than 
those  with  which  they  are  combined  in  structures,  such  as 
worked  stones,  wood,  and  metals. 

Much  confidence  has  been  from  time  to  time  expressed  in  the 
durability  of  steel  buried  in  brick  or  cement;  but  its  real  life, 
even  if  the  most  optimistic  view  be  adopted,  is  modified  by  that 
of  other  elements  combined  with  it,  or  entering  into  the  struc- 
ture which  it  supports.  The  frame  of  a  steel  cage  or  of  a  rein- 
forced concrete  structure  may  exceed  in  durability  the  exterior 
shell  of  the  building,  and  certainly  exceeds  the  life  of  the 
interior  trim  or  the  roof,  and  of  many  other  less  durable  parts ; 
but  its  eventual  fate  is  parallel  to  that  of  a  man  whose  skeleton 
is  in  excellent  shape,  when  his  demise  is  brought  about  by  some 
cause  affecting  other  and  less  stable  elements  in  his  composition. 

Thus,  some  of  the  diverse  views  expressed  on  this  general 
subject  may  be  due  to  the  consideration  of  a  single  feature  to 
the  exclusion  of  others,  or  to  consideration  only  of  one  or  more 
elements  in  a  combined  or  compound  structure. 

Some  attempts  have  been  made  to  assign  a  life-period  to 
structures  proportioned  upon  the  character  of  their  usage,  but 
such  classifications,  as  a  rule,  have  really  been  based  upon  con- 
siderations affecting  the  economic  depreciation  of  the  structure, 
and  this  method  may  fail  if  it  does  not  take  into  account  also 
the  character  of  the  construction  of  the  building;  in  other 
words,  the  mere  fact  that  a  building  is  occupied  for  one  form  of 
tenancy  or  another  does  not  in  itself  decide  the  length  of  its 
existence,  but  the  period  of  its  effective  life  may  be  very  largely 
dependent  upon  its  ability  to  withstand  the  stress  of  usage,  and 

54 


"Buildings  only  temporarily  enjoy  benefits  of  light  and  air  derived 
from  their  location  among  smaller  neighbors" 


Depreciation  of  the  Value  of  Buildings 


if  suitably  sound  in  material  and  construction  for  the  purpose 
of  its  occupation,  then  it  may  be  reasonably  assumed  that  its 
physical  life  will  extend  its  efficient  condition. 

A  step  further  in  this  direction  is  the  view  advanced  by  the 
author  of  "Principles  of  City  Land  Values,"  Mr.  Richard  M. 
Hurd,  who  assigns  a  duration  of  life  to  buildings  of  certain 
characters  in  proportion  to  the  cheapness  or  to  the  excellence  of 
their  general  construction,  with  modifying  reference  to  their 
general  usage.  This  apportionment  is  shown  in  the  following 
table,  to  which  has  been  added  the  column  of  the  rate  of  annual 
sinking-fund  recommended  by  that  authority,  with  the  term  of 
years  within  which  that  sinking-fund  will  mature  at  3%  com- 
pound interest,  which  brings  the  real  limitation  of  all  buildings 
in  this  classification  within  a  period  of  fifty  years. 

CLASSIFICATION  OF  DEPRECIATION 
Deduced  from  R.  M.  Kurd's  assignments  of  life 


Construction 

Occupancy 

Term  of 
life 
in  years 

Rate  of  fund 
proposed 
in  o/o 

Term  of  sink- 
ing fund  'a 
3%,  in  years 

Cheap  frame 

Tenements 

10-15 

10-5 

9-16 

Cheap  frame 

Residences 

25-3° 

3-2 

23-31 

Better-class  frame 

Residences 

5°-75 

2-1 

31-47 

Cheap  brick 

Tenements 

25-30 

3-2 

23-31 

Cheap  brick 

Residences 

35-5° 

2-1 

31-47 

Cheap  brick 

Office  buildings 

25-30 

3-2 

23-3i 

Better-class  brick 

Residences 

50-75 

1#-I 

37-47 

Good  brick  or  stone 

Office  buildings 

75-100 

I 

47 

NOTE:  Sinking-funds  bring  all  the  above  within  47  years. 

This  apportionment  is  based  on  a  shrewd  analysis  of,  and  a 
practical  acquaintance  with,  the  relative  effects  of  good  and 
poor  materials  and  workmanship  in  prolonging  or  shortening 
the  physical  life  of  a  building.  Such  a  method  is,  however,  not 
quite  determinate,  because  the  percentages  of  original  values 

55 


Building  for  Profit 


suggested  to  be  annually  laid  aside  for  the  amortization  of  the 
cost  of  the  property  do  not  agree  with  the  spaces  of  time  al- 
lotted, though  they  do  agree  in  a  conservative  limitation  of  the 
economic  existence  of  each  class  of  structure ;  and  the  classifica- 
tion of  buildings  by  their  character  of  construction  is  reason- 
able, in  view  of  the  general  practice  of  building  to  a  certain 
standard  for  certain  characters  of  tenancy  and  accompanying- 
rates  of  rental. 

Such  a  classification,  however,  accepts  the  building  as  a 
whole,  or  unit  of  equal  character  of  permanency  throughout,  or 
at  best  limits  the  life  by  an  assumption  that  the  life  of  all  parts 
is  alike  and  of  the  length  assigned. 

The  essential  feature  in  defining  a  method  for  arriving  at  the 
period  of  physical  existence  appears  to  be  the  segregation  of 
the  elements  which  compose  the  building,  the  assignment  to 
each  of  a  reasonably  effective  existence,  and  the  ascertainment, 
by  a  comparison  of  either  the  extent  or  the  value  of  each  ele- 
ment, of  an  average  life  of  the  whole  combination. 

Such  a  comparison  will  define  very  clearly  the  endurance  of 
the  parts  which  go  to  make  the  structure  a  whole,  and  will  make 
clear  the  extent  or  number  of  occurrences  of  repair  or  renewal 
which  can  be  expected  to  be  required  within  the  period  which 
may  be  found  to  be  that  due  to  the  most  durable  and  least  fre- 
quently repaired  portion. 

Thus  if  we  may  assume  a  building  to  be  composed  only  of 
stone  and  lumber,  it  would  be  natural  to  expect  that  the  former 
element  would  exceed  the  other  in  durability  and  also  in  ability 
to  withstand  the  effects  of  repair.  Wood  is  less  durable,  and, 
besides,  would  in  all  probability  be  subjected  to  strains,  shocks, 
and  variations  of  temperatures,  and,  moreover,  the  effect  of  any 
changes  or  repairs  would  be  to  weaken  its  general  character  in 
a  manner  which  masonry  would  not  feel ;  and  as  it  is  used  for  a 
variety  of  purposes,  some  of  which  involve  more  exposure  to 

56 


Depreciation  of  the  Value  of  Buildings 


wear  than  others,  such  as  flooring,  it  would  he  safe  to  say  if  a 
life  were  allotted  to  the  lumber  it  would  not  exceed  50%  of  the 
more  durable  element  in  the  structure. 

Therefore  the  necessity  for  reconstitution  of  the  woodwork 
of  the  structure  would  occur  at  one  half  the  time  of  life  of  the 
more  durable  element,  and  during  the  second  period  the  material 
would  not  possess  the  same  durability  as  before,  nor  would  the 
combined  structure,  as  a  patched  or  partly  remade  construction. 
The  mean  duration  of  the  two,  if  equal  in  extent  or  value,  would 
therefore  be  75%  of  that  of  the  longer-lived  element. 

The  proportion  which  the  component  parts  of  a  building  bear 
to  each  other  may  vary  greatly,  but  as  the  question  of  provision 
for  their  replacement  is  a  financial  matter,  their  relations  are 
most  readily  expressed  in  their  monetary  values,  or,  in  other 
words,  in  the  proportion  of  their  original  cost  to  that  of  the 
whole  structure.  Thus  if  the  financial  value  of  the  two  elements 
in  the  foregoing  instance  be  taken  as  two  of  wood  to  one  of 
stone,  and  the  life  of  the  masonry  alone,  if  uncombined  with 
lumber,  to  be  one  hundred  years,  then  the  relative  existence  of 
the  combined  structure  becomes : 

(2x  50)  +  (i  x  TOO) 

-  =  66  years. 

An  assignment  of  the  durable  life  of  different  building  com- 
ponents was  made  about  thirty  years  ago,  by  combining  and 
averaging  the  views  and  opinions  of  a  number  of  expert  build- 
ers in  different  parts  of  the  country,  forming  a  schedule  of  great 
interest,  which  is  still  regarded  as  of  authority,  and  is  valuable 
as  a  basis  for  determining  the  relative  durability  of  various  ma- 
terials in  buildings. 

These  opinions  assigned  to  the  most  substantial  parts,  such 
as  brickwork,  stonework,  and  fireproof  floors,  a  life  of  66  years 

57 


Building  for  Profit 


FIG.  10 


10    15    20    25    30    35    40    45    50    55    60    65    70    75 


Depreciation  of  the  Value  of  Buildings 


when  erected  in  combinations  of  ordinary  brick  and  frame  con- 
structions, and  of  75  years  when  forming  part  of  substantial 
brick  and  metal  buildings,  and  also  laid  down  the  life  to  be 
accorded  to  each  of  a  number  of  other  elements  entering  into 
such  combinations. 

By  applying  these  terms  of  durable  existence  to  the  values  of 
parts  of  a  series  of  buildings,  and  plotting  these  values  in  dia- 
grammatic form,  it  is  found  that  they  fall  within  the  line  of  a 
regular  curve,  indicating  the  correctness  of  the  assumptions. 

In  Fig.  10  the  two  curves  A  and  B  are  respectively  those  of 
the  average  values  of  twenty-two  frame  buildings  and  of  thirty- 
six  brick-and-stone  buildings.  These  values  are  set  off  on  the 
vertical  scale  of  depreciation,  and  their  respective  anticipated 
life  is  set  off  on  the  horizontal  scale  of  years.  In  curve  A,  the 
most  durable  elements  were  assumed  to  have  a  life  of  55  years, 
in  B  of  65  years,  and  in  C  of  75  years. 

The  curve  A  of  frame  buildings,  as  it  is  reasonable  to  expect, 
indicates  earlier  and  more  rapid  effects  of  declining  life,  and 
results  in  a  mean  life  of  34  years.  Curve  B  of  the  more  sub- 
stantial buildings,  by  reason  of  the  greater  extent  and  value  of 
the  more  durable  elements  in  its  -composition,  declines  less  rap- 
idly at  first,  though  it  eventually  takes  the  same  characteristic 
form,  and  results  in  a  mean  life  of  44  years. 

To  these  is  added  curve  C,  based  on  the  values  of  the  parts  of  a 
steel-framed  fireproof  office  building,  the  mean  life  of  which 
becomes  56  years.  The  solidity  of  general  construction  is  well 
indicated  by  the  shape  of  the  curve,  showing,  as  it  does,  a  slow 
rate  of  early  depreciation. 

The  evident  harmony  of  this  system  is  apparent,  and  results 
in  the  method  herein  advanced  for  the  determination  of  average 
life,  viz.,  to  relate  the  cost  values  to  the  existence  of  each  indi- 
vidual material  or  component  of  a  structure,  and  therefrom  to 
deduce  the  financial  mean  term  of  the  whole,  which  is  the  period 

59 


Building  for  Profit 


of  physical  deterioration  to  be  covered  by  financial  provision  or 
sinking-fund  for  its  amortization. 

The  method  involves  the  assignment  of  maximum  longevity 
to  the  most  durable  elements  of  the  combination,  to  which  the 
less  durable  may  be  related.  By  unduly  increasing  this  period, 
it  would  appear  that  the  average  life  could  be  extended  indefin- 
itely, but  such  a  method  carries  with  it  its  own  contradiction, 
because  the  physical  life  cannot  be  greatly  extended  beyond  the 
economic  or  useful  period  of  existence,  and  the  economic  use- 
fulness of  all  types  of  buildings  is  clearly  bounded  by  some 
reasonable  lapse  of  time,  and  especially  so  in  the  case  of  build- 
ings operated  for  commercial  profit,  to  which  this  subject  is 
particularly  pertinent.  This  is  shown  in  the  plotting  of  three 
periods  in  Fig.  n,  where  an  office  building  is  plotted  on  the 
basis  of  the  life  of  its  most  durable  parts,  of  66,  75,  and  100 
years.  While  the  two  former  show  harmonious  characteristics, 
the  latter  is  distorted. 

Not  only  the  opinions  expressed  by  authorities  such  as  those 
already  quoted,  but  consideration  of  the  conditions  of  modern 
building  construction,  lead  to  the  conclusion  that,  even  with 
most  careful  usage  and  the  best  of  modern  construction,  the 
physical  existence  of  buildings  is  limited  to  a  period  within  that 
usually  regarded  as  two  generations. 

In  response  to  such  an  assertion,  instances  may  be  afforded, 
no  doubt,  of  the  long  existence  of  ancient  materials;  of  old 
buildings  still  affording  serviceable  shelter;  of  exposed  metal 
which  with  care  and  liberal  paint  has  outlasted  a  half-century. 

Such  instances  will  prove  of  little  value,  because  modern 
building  methods  lack  not  only  the  general  massiveness  of  the 
ancient  but  their  simplicity  of  composition,  and  massiveness  of 
construction  or  mere  solidity  of  one  part  is  not  in  itself  a  source 
of  longevity  to  other  more  perishable  material.  Modern  con- 
struction is  composite  and  employs  complex  materials,  and  those 

60 


Depreciation  of  the  Value  of  Buildings 


materials  are  generally  reduced  in  proportions  and  subjected  to 
greater  strains  than  in  older  structures.  The  wear  and  tear  of 
parts  is  vastly  increased,  and  new  forms  of  strains  and  vibra- 
tions due  to  modern  machinery  and  appliances,  to  traffic,  to  local 
blasting  work,  and  to  the  introduction  of  heating  and  steam- 
raising  apparatus,  all  enter  into  the  racking  or  straining  of  the 
elements  of  the  structure,  and  even  extend  into  the  disintegra- 
tion of  inert  materials,  such  as  concrete. 

In  ancient  construction,  beams  and  rafters  were  exposed,  so 
that  dry-rot  was  avoidable,  and  when  houses  were  unheated, 
warping  of  lumber  and  cracking  of  trim  were  rare.  The  hu- 
midity as  wrell  as  the  temperature  in  old  buildings  followed 
natural  combinations,  while  lumber  was  cheap  and  plentiful  and 
was  used  with  prodigality  and  corresponding  solidity. 

The  complexity  of  materials  now  employed  in  construction, 
the  durability  of  many  of  which  is  unknown,  is  another  reason 
for  conservative  limitations.  Much  discussion  has  been  devoted 
to  the  subject  of  the  permanency  of  reinforced  concrete  con- 
structions, which  only  time  will  fully  decide;  but  even  if  the 
strength  and  inert  character  of  reinforced  concrete  be  con- 
ceded, it  is  still  found  to  be  subject  to  deterioration  by  tempera- 
ture changes,  and  even  in  such  enormous  masses  as  are  used  in 
dam  construction  this  vast  and  silent  force  has  rent  the  mass 
and  opened  the  channel  for  deterioration. 

The  exterior  face  of  a  steel-frame  and  brick  building  may  be 
in  part  granite,  ashlar,  marble,  limestone,  pressed  brick,  or 
terra-cotta.  All  are  not  equally  durable;  some  are,  in  modern 
construction,  extremely  slender  in  dimensions;  all  are  exposed 
to  the  action  and  reaction  due  to  extremes  of  frost  and  heat,  as 
well  as  to  the  interior  expansion  and  contraction  of  the  frame 
that  supports  them. 

Materials  combined  in  modern  constructions  are  tabulated  on 
the  following  page,  with  assignments  of  probable  life. 

61 


TABLE  B 

RELATIVE  LIFE  OF  THE  COMPONENT 
PARTS  OF  BUILDINGS 


I.    GOOD    FRAME    CONSTRUCTION 

Life  of  most  durable  part=45-55  years  or  ioo7f 

Relative  to 

Relative  to 

Years 

Materials 

45  ys-     55  ys 

Years 

Materials 

45  ys.    55  ys. 

Percent. 

Percent. 

45-55 

Masonry 

IOO 

IOO 

25 

Floors  and  stairs 

55 

45 

45 

Exterior  brickwork 

IOO 

82 

3° 

Hard-wood  trim 

66 

54 

44 

Brick  flues 

99 

80 

33 

Plastering 

73 

60 

4i 

Lumber  framing 

90 

75 

2O 

Hardware 

44 

36 

39 

Studding 

86 

70 

3° 

Tinwork 

66 

54 

33 

Mill-work 

73 

60 

20 

Exterior  ironwork 

44 

36 

33 

Sheathing 

73 

60 

6 

Exterior  paint 

J3 

1  1 

27 

Exterior  woodwork 

60 

49 

9 

Decorat'n  and  varnish 

20 

i? 

J3 

Shingles 

30 

24 

18 

Fixtures 

40 

34 

II.    BRICK    AND    STONE    CONSTRUCTION 

Life  of  most  durable  part=55-66  years  or  100% 

Relative  to 

Relative  to 

Years. 

Materials 

55  ys   |  66  ys. 

Years 

Materials 

55  ys.  |  66  ys. 

Percent. 

Percent. 

55-66 

Most  durable  part 

IOO 

IOO 

27 

Flooring  and  stairs 

49 

4i 

53 

Exterior  brick 

96 

80 

35 

Trim 

63 

53 

53 

Brick  flues 

96 

80 

33 

Plastering 

60 

5° 

5° 

Lumber 

90 

76 

20 

Hardware 

36 

30 

40 

Studding 

72 

61 

3° 

Ornamental  ironwork 

54 

45 

33 

Mill-work 

60 

5° 

20 

Exterior  ironwork 

36 

3° 

27 

Exterior  woodwork 

49 

4i 

6 

Exterior  paint 

1  1 

9 

27 

Roofing-slag 

49 

41 

10 

Decorat'n  and  varnish 

18 

i5 

33 

Roofing-tile 

60 

5° 

20 

Fixtures 

*36 

3° 

III.    MODERN    FIREPROOF    CONSTRUCTION 

Life  of  most  durable  part—  66-75  years  or  100% 

Relative  to 

Relative  to 

Years 

Materials 

66  ys.     75  ys. 

Years 

Materials 

66  ys  |  75  ys. 

Percent. 

Percent. 

66-75 

Most  durable  part 

IOO 

IOO 

5° 

Interior  ironwork 

76 

66 

45 

Exterior  cut  stone 

68 

60 

22 

Exterior  ironwork 

33 

29 

60 

Exterior  brick 

91 

80 

45 

Window  mill-work 

68 

60 

60 

Exterior  terra-cotta 

91 

80 

40 

Hard-wood  trim 

61 

53 

66 

Interior  masonry 

IOO 

88 

9 

Glass 

14 

12 

40 

Interior  cut  stones 

61 

53 

9 

Interior  decoration 

i4 

I  2 

36 

Interior  marbles 

54 

48 

20 

Exterior  woodwork 

3° 

26 

36 

Plastering,  plain 

54 

48 

25 

Hardware 

37 

33 

30 

Plastering,  decorative 

45 

40 

2O 

Sidewalks 

3° 

26 

27 

Stone  flooring 

4i 

36 

24 

Roof-houses 

36 

32 

24 

Wood  flooring 

36 

32 

27 

Tanks 

4i 

36 

3° 

Stairs  and  steps 

45 

40 

20 

Plumbing  fixtures 

3° 

26 

27 

Roofing-slag 

4i 

36 

20 

Lighting  fixtures 

3° 

26 

40 

Roofing-tile 

61 

53 

33 

Piping 

5° 

44 

46 

Partition 

70 

61 

20 

Elevator 

3° 

26 

46 

Joinery 

70 

61 

7 

Paint 

10 

9 

62 


Depreciation  of  the  Value  of  Buildings 


The'  life  of  the  combination  is,  therefore,  relative  to  that  of 
the  most  durable  part,  in  proportion  to  the  share  of  the  total 
borne  by  each  portion,  or,  from  the  monetary  point  of  view,  to 
their  share  in  the  cost. 

LIFE  OF  THE  MOST  DURABLE  PART 

In  the  cheapest  frame  construction      ....  40  to  50  years 

In  good  frame  construction 45  to  55 

In  brick-stone-wood  construction    .     .     .     .     .  5 5  to  66 
In   steel-brick-terra-cotta   or   stone   compound 

constructions '    .     .  66  to  75 

In  reinforced  concrete 75  to  90 

In  most  massive  forms  of  a  single  material  .     .  90  to  100 

The  life  of  the  less  durable  materials  which  are  to  be  com- 
bined with  the  foregoing  becomes  related  thereto,  and  may  be 
assigned  proportionate  terms  of  existence,  such  as  those  which 
appear  in  Table  B. 

The  foregoing  limitations,  varying  with  complexity  or  sim- 
plicity of  the  construction,  may  be  modified  to  meet  individual 
experiences  or  special  or  local  conditions,  but  the  shifting  of  one 
or  other  element  higher  or  lower  in  the  scale  will  not  affect  the 
principle  of  application,  so  long  as  too  lengthy  periods  are  not 
adopted  for  the  most  durable  parts. 

By  applying  to  the  cost  or  quantity  of  each  element  in  the 
building  its  relative  life,  and  taking  the  average  or  mean  of  the 
whole,  a  period  is  found  upon  which  to  base  the  expectancy  of 
loss  of  entire  value.  The  ratio  which  each  element  bears  to  the 
whole  is  most  readily  expressed  in  its  monetary  value,  as  the 
quantities  do  not  relate  to  one  another  in  any  common  terms 
except  that  of  money.  The  method  followed  is  illustrated  by 
the  following  tabulation  of  the  component  parts  and  respective 
values  of  a  steel-frame  office  building. 

63 


Building  for  Profit 


FIG.  11 


Scale  of  Years 
40          50        60 


A=Assume  Most  Durable  Part  =  66  years 
Then  Mean  Life  =52  yrs. 

B=  Assume  Most  Durable  Part  =75  years 

Then  Mean  Life  =  56  yrs. 

=  Assume  Most  Durable  Part=100  yrs. 

Then  Mean  Life  =70  yrs. 


Life  of  most  durable  part  -Years    66 


64 


Depredation  of  the  Value  of  Buildings 


TABLE  C 

METHOD   OF  ASCERTAINING  MEAN  LIFE  OF  A   BUILDING 
Example  of  a  steel-frame  fireproof  office  building 


Material 

/ 

Life  rel.  to 
f6  yrs. 

e 

Cost  rel.  to  total 
cost  of  bldg. 

,x. 

Foundations     '. 

I  OO  % 

e.7% 

^  3O  .  O 

Steel  framing       
Masonry      

TOO 
IOO 

7.6 

-2-2.7 

760.0 
•?^?7O    O 

Fireproof  floors   
Ornamental  iron        
Heating        

IOO 

73 
^o 

2  .  O 

6.3 
-j  .  -i 

2OO.O 

459-9 
161;  .  o 

Plumbing     
Electric  wiring     
Partitions     

5° 
5° 
7° 

2  .O 
I  .  2 

75-° 

IOO.O 

84.0 

Joinery    

70 

TL  .  -t 

2?8.0 

Fixtures  (plumbing")     .... 
Roofing  (tile)       

29 

^0 

12.6 

2  .  O 

365.4 
118.0 

Plastering    . 
Marble    
Elevator       
Hardware    

54 
54 
3° 

^7 

3-8 
9.6 

3-1 

205.2 

518.4 

93-0 
18.5 

Glass       

14 

i 

18.2 

Paint       

IO 

0.8 

8.0 

Totals    

IOO 

7327.6 

7  3  2  7    6 

Mean                 —  73   276%'  of  6 

5  years   or  a 

mean  life  ol 

A  8  if\  vrs 

IOO 

It  may  be  observed  that  such  items  as  supervision,  plans,  fees, 
and  carrying  charges  during  construction  should  be  spread  over 
the  other  items,  as  each  derives  a  proportionate  benefit  there- 
from. 

Relative  costs  are  not  difficult  to  procure  from  those  experi- 
enced in  constructive  work,  and  it  would  be  well  if  in  every 
building  operation  such  a  record  was  made. 

6s 


Building  for  Profit 


In  Fig.  12  the  curve  A  is  a  brick  railroad  roundhouse  and  C 
a  modern  brick  and  metal  factory,  with  which  is  repeated  the 
curve  B  of  the  average  of  36  brick  buildings  from  Fig.  10, 
plotted,  for  comparison.  Relating  all  to  a  life  of  66  years  of 
the  most  durable  parts,  they  give  respectively:  A  48  years,  B 
44  years,  and  C  53  years  mean  life. 

The  foregoing  instances  afford  a  view  of  the  application  of 
the  method  of  apportionment  to  quite  a  variety  of  structures, 
and  cover  relative  construction  costs  under  very  differing  local 
conditions.  In  all,  the  process  of  depreciation  is  relatively  slow 
during  the  first  part  of  the  existence  of  the  building,  but  is 
greatly  accelerated  during  the  latter  part,  indicating  its  pro- 
gressive character.  Table  E  gives  the  rate  of  annual  sinking- 
funds  for  any  term  of  years  from  10  to  60,  at  rates  of  compound 
interest  from  2l/2  to  6%. 


II.  THE  ECONOMIC  LIFE  OF  BUILDINGS 

WE  now  proceed  to  examine  the  second  part  of  this  subject, 
financial  or  economic  depreciation,  the  term  of  which  must 
naturally  fall  within  that  of  physical  deterioration. 

Some  uncertainty  due  to  this  cause  attends  the  permanency 
of  the  investment  of  money  in  real  estate,  notwithstanding  the 
vast  appreciation  in  value  of  land  in  certain  cities,  especially  in 
New  York,  which  is  a  natural  inducement  for  the  purchase  of 
real  property.  The  prospective  investor  is  frequently  led  to 
think  that  the  future  appreciation  of  the  land  will  recompense 
him  for  any  over-valuation  of  improved  property  at  the  time 
of  the  purchase,  or  for  depreciation  of  the  building  thereafter. 

This  is  not  always  the  case  as  has  been  shown,  and  therefore 
consideration  should  be  given  to  underlying  causes  which  tend 
to  reduce  the  earning  capacity  of  the  buildings  which  form  the 
improvement,  rather  than  to  depend  upon  an  indeterminate 

66 


Depreciation  of  the  Value  of  Buildings 


FIG.  12 


c 

5 
10 
15 
20 
25 

Scale  of  Years 
5           10           15          20          25          30          35          40          45         50          55          60          65         70 

^^ 

^ 

^ 

X 

§ 

*x 

^ 

V 

\ 

x\ 

\\ 

\ 

35 

J3 

^45 

V 
Q. 

C 

\ 

\S 

\ 

\ 

y  \ 

L 

s 

\ 

0 

a 

TD 

"Sfin 

\ 

\\ 

\ 

\\ 

\ 

~a 
70 

80 
90 
100 

\     * 

\ 

\\ 

\ 

•V 

COUR 

SE  OF  PHYSICAL  DEPRECIATION 
R.R.  Roundhouse;  Mean  life=48  years 
of  36  Brick  Bldgs;    Mean  life=44  years 
ern  Factory  Building;  Mean  life=53  years 

\\ 

v  \ 

A-Bricl< 
B=Aver 
C=Mod 

\ 

\\\ 

\\ 

i 

\ 

1 

\ 

i 

66  years 

Building  for  Profit 


appreciation  of  the  land  value  to  cover  any  loss  in  the  value  of 
the  building  or  in  its  earnings. 

The  useful  or  economic  existence  of  all  classes  of  buildings, 

•  o     • 

in  the  rapid  march  of  modern  conditions,  is  constantly  shorten- 
ing, and  a  methodical  system  should  be  adopted  by  which  pro- 
vision may  be  made  for  this  contingency,  which  is  apparently 
as  inevitable  as  the  physical  aging  of  the  structure,  and  may  be 
more  rapid  in  its  effects. 

The  establishment  of  vested  interests  in  some  improved 
properties  in  excess  of  the  earning  ability  of  the  buildings 
thereon,  after  a  certain  period  of  usage,  is  a  result  of  the  con- 
struction of  unduly  expensive  structures,  not  merely  for  the  site 
occupied,  but  for  the  effective  earning  period  of  their  existence. 

Many  experienced  observers  have  pointed  out  the  undesira- 
bility  of  the  "top-heavy"  improvement  of  real  estate,  and  the 
opinions  of  authorities  will  be  found  to  be  warranted  by  results 
in  very  many  instances  of  over-building.  It  is  a  matter  of  com- 
mon remark  among  those  interested  in  real  estate  that  the 
existence  of  so  many  well-known  buildings  and  of  such  varying 
types  should  have  come  to  an  end  in  so  rapid  and  apparently 
premature  a  manner. 

Buildings  considered  when  erected  to  be  of  the  most  perma- 
nent character  of  improvement  have  not  survived  a  period  of  a 
third  of  a  century  of  remunerative  existence,  and  in  some  in- 
stances extensive  remodeling  operations  have  been  required  to 
prolong  their  economic  existence,  in  spite  of  careful  and  liberal 
current  expenditures  upon  upkeep.  It  has  also  been  observed 
that  the  more  prominent  and  valuable  the  site,  the  earlier  is  the 
date  at  which  the  process  of  reconstitution  will  be  due.  It  is 
upon  such  sites  that  the  most  extensive  and  elaborate  buildings 
are  often  erected. 

In  the  case  of  hotel  buildings  the  effect  of  financial  deteriora- 
tion is  most  quickly  apparent,  and  it  is  the  expressed  opinion  of 

68 


Depreciation  of  the  Value  of  Buildings 


one  of  the  most  able  and  successful  of  metropolitan  hotel  pro- 
prietors that  the  efficient  profit-earning  period  of  a  hotel  de- 
pendent upon  fashion  for  its  support  does  not  greatly  exceed 
fifteen  years.  Some  hotel  buildings  have,  it  is  true,  existed  for 
about  a  third  of  a  century,  but  their  earning  capacity  has  been 
gradually  declining,  and  more  than  one  instance  of  a  one-time 
"fashionable  hotel"  could  be  cited  which  after  little  more  than 
a  decade  and  a  half  has  been  productive  only  of  increasing  ex- 
penses in  face  of  reducing  returns. 

A  rather  definite  illustration  of  this  subject  is  afforded  in  the 
recent  sale  of  a  1 2-story  hotel  of  about  twelve  years  of  age  on 
a  West  Side  street  near  a  fashionable  avenue  in  Manhattan. 

This  building,  on  a  plot  60  feet  x  99  feet,  is  of 
about  700,000  cubic  feet  contents  and  originally 

cost  about  36  cents  a  cubic  foot,  or $250,000 

The  building  and  land  were  mortgaged  at  5  %  for  $360,000 
and  a  recently  appraised  value  of  both  was      .     .  $540,000 

The  sale,  however,  brought  only $440,000 

The  site  has  an  assessed  value  for  taxation  of 

about  60%,  or $188,000 

So  that  its  market  value  if  it  were  unencumbered 

by  a  building  might  be $313,000 

The  value  brought  by  the  building  was  therefore 

only $127,000 

which  is  about  18.2  cents  per  cubic  foot,  or  50/0  less  than 
the  original  outlay  in  the  short  period  of  its  existence. 

If  this  loss  on  the  building  be  assumed  to  have  been  made  up 
by  the  increment  of  land  value,  then  the  latter  must  have  risen 
in  twelve  years  from  $190,000  to  $313,000,  or  about  65%,  but 
even  if  so,  there  has  been  no  profit  in  the  whole  transaction. 

The  process  of  deterioration  existing  in  business  buildings  is 
somewhat  less  rapid,  but  equally  inevitable.  It  is  varied  only 

69 


Building  for  Profit 


by  certain  instances  where  peculiar  location  and  surroundings 
outweigh  the  attractions  of  newer  buildings  and  localities  and 
serve  to  maintain  or  even  to  increase  the  rentals.  But  the  insis- 
tence of  modern  business  life  demands,  sooner  or  later,  exten- 
sive and  expensive  remodeling  or  partial  reconstruction,  for 
which  in  most  instances  no  preparation  or  provision  has  been 
made,  and  which  is  therefore  frequently  postponed  to  the  grow- 
ing disadvantage  of  the  investment.  Mere  huge  proportions  or 
expensive  construction  cannot  be  relied  upon  to  bar  the  need 
for  remodeling  in  the  future,  any  more  than  similar  conditions 
have  done  in  the  past,  as  in  the  instance  of  the  first  steel-frame 
building,  which  has  barely  lasted  long  enough  to  become  inter- 
esting ere  it  is  likely  to  be  condemned;  while  radical  changes 
have  been  made  recently  in  some  comparatively  modern  steel- 
frame  structures. 

The  Gillender  Building,  fourteen  years  in  existence,  furnished 
evidence  of  the  indestructibility  of  the  steel  skeleton  when  its  mem- 
bers are  protected  in  a  sufficient  manner.  But  in  these  days  the  dura- 
bility of  building  materials  has  mostly  been  dropped  from  the  list  of 
controversial  questions  in  metropolitan  work.  For  in  practice  it  is 
found  that  the  physical  is  almost  certain  to  exceed  the  economic  dura- 
bility of  a  building  as  a  whole. 

Over-expense  in  original  construction,  ill  proportion  for  the 
value  of  the  site,  unsuitability  for  situation,  and  maldesign  are 
fundamental  causes  which  hasten  the  progress  of  financial 
decay. 

But  other  causes  for  which  the  designers  of  the  building  are 
not  directly  responsible,  but  by  which  the  property  is  never- 
theless a  sufferer,  may  equally  inevitably  bring  about  a  period 
to  the  useful  existence  of  a  building.  A  change  of  fashion, 
shift  of  business,  movement  of  population,  alteration  in  line  of 

70 


Depreciation  of  the  Value  of  Buildings 


traffic,  or  even  some  untoward  local  occurrence  or  change  in 
nature  of  ownership,  which  injures  the  character  of  its  neigh- 
borhood, may  leave  the  building  a  financial  log  upon  its  site, 
an  economic  failure,  and  an  obstruction  on  the  real  estate,  pro- 
portionate to  its  size  and  original  expense. 

Even  its  construction  as  one  of  a  large  number  of  similar 
buildings  may  contribute  to  bring  about  such  a  result,  since  sec- 
tions of  cities  built  up  with  great  uniformity  usually  drift  into 
a  lower  class  of  occupancy  and  reduced  rentals. 

Or,  inversely,  if  built  too  elaborately  for  its  associations,  it 
will  gradually  settle  to  their  level,  as  an  expensive  residence 
does  when  placed  among  cheaper  neighboring  buildings.  A  fine 
old  mansion  will  generally  bring  less  rental  than  a  cheaper  but 
more  modern  cottage  as  soon  as  its  appropriate  surroundings 
are  changed. 

The  march  of  alteration,  often  miscalled  "improvement," 
is  inexorable  in  modern  cities,  and  their  past  history  shows  a 
process  of  reconstruction  occurring  about  three  times  in  a  cen- 
tury, a  natural  result  of  progressive  growth  of  population  and 
relative  increase  in  demand  for  accommodation  in  restricted  and 
central  locations,  bringing  about  a  limitation  of  the  useful  or 
economic  existence  of  buildings  of  various  classes ;  a  condition 
only  to  be  partially  remedied  by  the  expenditure  of  new  capital 
in  reconstruction  or  remodeling  whereby  the  efficiency  of  the 
building  may  be  somewhat  renewed  and  its  effective  existence 
extended. 

If  such  contingencies  were  taken  into  account  at  the  time  of  the 
construction  of  buildings,  it  is  probable  that  many  extravagant 
unnecessary  expenditures  would  be  avoided,  and  only  such  ex- 
pense incurred  as  would  be  justified  by  estimates  conservatively 
based  upon  gradually  decreasing  returns  derived  from  such  ex- 
pense. The  risks  involved  and  the  burden  undertaken  in  the 
enormously  expensive  exterior  and  interior  decorations,  the 

71 


Building  for  Profit 


equipments  and  the  conveniences  of  certain  buildings,  may  per- 
haps appear  justifiable  in  view  of  the  present  attractiveness  of 
such  details,  but  they  should  properly  show  a  commensurate  re- 
turn in  the  rentals,  not  only  at  first,  but  after  years  of  existence 
and  competition,  and,  more  conservatively,  they  should  be  cov- 
ered by  an  annual  investment,  laid  aside  from  their  earnings, 
proportioned  to  their  limited  life  of  usefulness. 

It  is  true  that  some  buildings  have  lingered  long,  so  long,  in 
fact,  that  in  some  cases  the  tide  of  land  values  has  passed  over 
them  and  they  have  become  stagnated.  Instances  will  be  re- 
called of  antiquated  or  inadequate  buildings  which  have  waited 
long  for  the  turn  of  the  tide,  and  in  the  meantime  have  not 
earned  a  justifiable  interest  upon  any  increase  in  the  value  of 
their  sites.  These  are  instances  of  failure  to  effect  reasonable 
improvements  in  due  time  and  in  manner  adequate  to  existing 
conditions. 

Alterations  and  disuse  of  residential  buildings  are  often 
rapid,  and  are  due  chiefly  to  their  changed  local  surroundings. 
In  many  cases  the  expenditures  upon  such  structures  were  mod- 
erate, and  the  increase  of  the  value  of  the  site  has  outbalanced 
the  loss  on  the  building. 

But  in  the  case  of  the  tenement,  flat,  and  apartment-houses, 
the  interests  of  a  very  wide-spread  class  of  small  investors  are 
affected  by  a  decrease  in  earning  capacity  and  in  capital  value 
which  may  be  brought  about  by  competition,  by  change,  and  by 
age. 

It  is  too  early  as  yet  to  observe  these  effects  upon  the  higher 
class  of  apartment-house,  apartment-hotel,  or  residential  hotel, 
but  in  the  case  of  an  enormous  number  of  5-story  tenements  or 
flats  which  preceded  the  advent  of  the  elevator  apartment  build- 
ing, some  such  results  may  be  readily  observed. 

Large  sections  of  the  borough  of  Manhattan,  for  instance, 
are  covered  with  such  properties,  and  these  are  affected  in  capi- 


"Over-expense  in  original  construction,  ill  proportioned  for  the  value 
of  the  site,  is  a  fundamental  cause  of  financial  decay" 


Depreciation  of  the  Value  of  Buildings 


tal  values  not  only  by  periodic  variations  in  rentals,  due  to  the 
fluctuations  of  supply  and  demand,  reducing  their  average  re- 
turns, but  by  permanent  reductions  due  to  the  competition  of 
more  alluring  conveniences  in  other  buildings  and  localities. 

Such  buildings  cannot  be  regarded  as  instances  of  over-build- 
ing in  the  sense  of  disproportion,  but  are  instances  of  over- 
building of  a  single  type  and  perhaps  still  more  of  the  practice 
of  building  without  regard  to  possible  future  developments.  In 
very  few  cases  was  provision  made  for  the  contingency  of  fu- 
ture additions.  In  many  a  5-story  tenement  the  addition  of  an 
extra  four  inches  on  the  second-story  walls  would  have  enabled 
the  later  owner  to  add  another  story  to  the  building,  thereby 
substantially  increasing  its  earnings,  but  as  this  provision  was 
not  made,  a  falling  off  in  value  cannot  be  arrested. 

The  planning  of  a  building  is  not  really  complete  unless  it 
takes  into  account  some  such  possible  future  contingency. 
There  are  many  tenements  which  could  have  been  readily  im- 
proved by  their  alteration  into  stores  or  lofts,  but  their  flimsy 
original  construction  wrill  not  permit  of  this  course  without 
practical  destruction  of  the  original  structure.  Recent  instances 
of  such  changes  indicate  that  the  fate  of  much  of  the  older  tene- 
ment or  apartment-house  property  may  be  an  entire  alteration  of 
character,  such  as  the  following  out  of  many  recently  recorded : 

(1)  $30,000  worth  of  alterations,  changing  an  apartment-house 
at  Broadway  and  54th  Street  for  loft  purposes. 

(2)  Four  4-story  flats  on  lots  20  feet  x  102. 2   feet  each.     They 
will  at  once  be  changed  into  modern  English-basement  residences. 

(3)  5~story  tenement  reduced  to  2  stories,  the  entire  front  removed 
and  rebuilt  as  a  store  and  offices  above. 

All  properties  are  usually  appraised  with  some  recognition 
of  the  probability  of  fluctuating  rental  returns,  and,  as  these 
bring  about  a  probable  limit  to  their  earning  life,  some  portion 

73 


Building  for  Profit 


of  the  gross  rentals  should  be  set  aside  at  compound  interest  to 
provide  for  the  gradual  reduction  of  the  value  of  the  building 
and  the  eventual  necessity  for  its  remodeling  or  reconstruction. 

If  this  practice  be  followed,  as  is  no  doubt  done  by  conserva- 
tive investors,  the  scale  of  estimated  capital  values  of  improved 
property  would  be  related  to  the  returns  reduced  by  the  depre- 
ciation fund,  and  perhaps  the  fund  would  form  part  of  the 
negotiable  property.  Where  it  is  not  done,  there  is  liable  to  be 
an  eventual  disappointment  in  the  results  of  the  investment. 
There  would  seem  to  be  immense  opportunities  for  insuring 
corporations  in  the  establishment  of  such  funds  or  their  equiva- 
lent. 

As  buildings  are  not  only  a  part  of  real  estate  investment 
which  is  subject  to  elements  of  financial  deterioration,  but  are 
liable  to  not  wholly  predictable  changes  of  circumstances,  such 
anticipations  should  not  be  ignored  in  their  planning,  and  pro- 
vision for  both  forms  of  contingency  would  be  to  the  general 
advantage  of  real  estate  from  the  investor's  point  of  view.  And 
since  this  is  the  case,  it  is  of  vital  importance  that  no  undue 
extent  of  capital  should  be  embarked  in  the  construction. 

Some  difficulty  has  been  expressed  by  investors  with  whom 
the  foregoing  matter  has  been  discussed,  in  deciding  upon  the 
period  which  should  be  allotted  to  the  existence  of  their  build- 
ings, due  to  the  causes  herein  discussed,  apart  from  the  ques- 
tion of  physical  decay  or  deterioration. 

Such  a  period  may  naturally  be  the  subject  of  very  close  in- 
vestigation and  of  expert  opinion  in  any  given  instance,  yet  as 
such  study  and  views  must  depend  largely  on  personal  observa- 
tions of  results  in  other  structures,  some  general  consideration 
such  as  herein  given  may  be  of  value. 

Taking  observed  effects  of  the  past  third  of  a  century  in 
Manhattan  as  a  guide— and  it  may  be  noted  that  we  have  only 
such  past  experiences  to  aid  us  in  our  estimation  of  future  prob- 

74 


Depreciation  of  the  Value  of  Buildings 


abilities — it  seems  that  the  progressive  deterioration  of  the 
earning  capacity  of  buildings  is  the  result  of  the  influence  of 
fashion,  change  of  habit,  competition,  development  of  new  terri- 
tory and  shifting  of  the  centers  of  population  and  business, 
altering  of  lines  of  transit,  and  other  causes,  all  of  which  act 
in  the  same  direction  of  deterioration,  but  in  different  degrees 
in  the  various  classes  of  buildings. 

Any  interested  observer  can  place  alongside  a  scale  of  years 
the  instances  which  have  come  under  personal  observation,  by 
which  Table  D  may  be  confirmed  or  modified. 

It  may  be  reasonably  assumed  that  any  graduated  arrange- 
ment ranging  from  the  ephemeral  "taxpayer"  to  the  "monu- 
mental" institution  will  not  extend  beyond  approximately  half 
a  century  of  effective  earning  life. 

It  must  be  remembered  that  Table  D  is  not  a  tabulation  of 
mere  existence,  which  might  be  as  prolonged  as  that  of  the 
pyramids,  but  which  would  have  little  effect  upon  prolonging 
.effective  income-producing  existence,  which  can  only  be  in- 
creased by  changes,  remodeling,  or  reconstruction. 

A  comparison  of  the  periods  thus  allotted  to  the  effective 
existence  of  various  classes  of  buildings,  with  those  derived 
from  the  study  of  their  physical  life,  brings  out  the  feature  that 
the  effective  or  economic  life  thus  suggested,  even  when  ex- 
tended or  renewed  by  the  remodeling  as  indicated,  falls  within 
the  period  of  and  is  substantially  shorter  than  the  limit  of 
physical  existence,  which  indicates  that  the  assumptions  regard- 
ing the  former  are  based  on  reasonable  conclusions. 

The  economic  value  of  many  buildings  is  dependent  to  a  con- 
siderable extent  upon  the  maintenance  of  its  character  or  pur- 
pose, by  effective  service,  and  by  careful  maintenance  and 
repair.  Good  results  in  these  directions  to  a  certain  extent  off- 
set the  competition  of  modern  improvements,  or  postpone  the 
necessity  for  remodeling  or  reconstruction. 

75 


Building  for  Profit 


TABLE  D 
ECONOMIC  EXISTENCE  OF  BUILDINGS 


Type  of  building 

Life  in  years 

"Taxpayer"       

I  2-1  C 

Hotels      . 

15-lS 

Apartment-houses      

I  8-2  I 

Store  buildings 

2  I—  2C 

Tenements  and  flats  

2C-27 

Office  and  business  buildings  

27-77 

Lofts  and  factories    

33-37 

Residences    

37-44 

Banks  and  institutions    

44-  co 

From  this  observation  it  may  be  gathered  that  the  conserva- 
tive course  is  to  adopt  the  shorter  period  on  which  to  base  the 
fund  for  the  amortization  of  the  original  cost  of  the  building. 

The  whole  matter  may  be  summarized  by  stating  that  the 
course  of  physical  depreciation  or  deterioration  of  buildings 
follows  character  of  construction,  and  is  the  average  of  the 
relative  life  of  the  various  component  parts  of  a  building.  This 
life  presupposes  reasonable  care  and  repair  and  partial  replace- 
ment in  detail  during  the  period  of  existence,  or  what  is  known 
as  "upkeep."  Economic  depreciation  or  deterioration  may  bring 
about,  and  generally  does  so  under  city  conditions,  a  shorter 
•period  to  the  existence  of  the  building,  even  with  a  substantial 
reconstruction  during  that  economic  existence. 

The  result  of  remodeling  or  partial  reconstruction  is  to  renew 
to  a  certain  extent,  at  the  time  of  its  undertaking,  the  effective 
earning  capacity  of  a  building;  but  inasmuch  as  the  practical 
effect  is  seldom  more  than  a  compromise,  the  result  cannot  be 
considered  wholly  effective  or  equally  as  permanent  as  the 
original  outlay.  The  previous  process  of  economic  deteriora- 


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U 


Building  for  Profit 


tion  sets  in  at  a  new  rate,  and  the  net  result  is  a  prolongation 
for  a  period  less  than  the  original  term. 

The  rates  for  amortization  which  should  apply. to  provision 
of  depreciation  funds  either  for  economic  or  physical  deteriora- 
tion are  tabulated  in  Table  E,  in  the  form  of  a  percentage  on 
original  value  to  be  annually  set  aside,  at  various  rates  of  com- 
pound interest. 

Since  the  rates  at  which  the  process  of  compounding  can  be 
followed  with  the  least  amount  of  care  are  those  obtainable  in 
savings-banks,  the  scale  has  been  carried  as  low  as  2l/2%,  but 
there  will  be  cases  where  the  sum  annually  set  aside  for  depre- 
ciation may  be  reinvested  in  the  business  of  the  investor,  and 
may  therefore  be  capable  of  bringing  in  a  higher  annual  return. 

The  conservative  course  to  be  pursued  is  naturally  the  actual 
physical  setting  aside  of  money  for  a  depreciation  fund  in  some 
definite  investment,  and  the  effects  of  neglect  of  this  practice 
may  be  seen  in  buildings  in  which  remodeling  is  overdue  or 
reconstruction  is  unduly  postponed  for  lack  of  funds,  and  in 
others  where  the  increase  in  value  of  the  land  has  failed  to  offset 
the  loss  in  the  building. 


bo 

a 


DEPRECIATION  OF  MECHANICAL  EQUIPMENTS 
AND  POWER  PLANTS 

I.  PHYSICAL  DETERIORATION 

THE  depreciation  of  engineering  equipment  and  appli- 
ances appears  to  follow  equally  well  the  same  general 
principles  as  apply  to  other  elements  in  building  con- 
struction, but  in  a  markedly  increased  ratio. 

Where  its  costs  bear  any  large  relation  to  the  total  cost  of  a 
building,  the  inclusion  of  an  elaborate  system  of  piping,  and 
especially  of  machinery,  adversely  affects  and  reduces  the  total 
life  of  the  combined  structure,  a  fact  to  which  very  little  obser- 
vation has  heretofore  been  directed.  The  effects  of  the  inter- 
relation of  metallic  apparatus  with  other  parts  of  the  structure 
are  generally  similar  to  those  already  discussed,  but  are  in- 
creased by  the  more  perishable  class  of  the  materials  em- 
ployed, by  their  more  active  character,  and  by  the  mechanical 
movements,  and  the  thermal,  electrical,  and  chemical  effects, 
which  they  introduce  into  the  structure. 

It  therefore  follows  that  their  character  not  only  affects  the 
general  average  of  their  own  existence,  but  detracts  appreciably 
from  that  of  the  building. 

Throughout  modern  structures,  miles  of  buried  piping  lie 
beneath  other  materials,  which  would  have  to  be  destroyed  if  it 
should  at  some  period  be  necessary  to  renew  or  replace  the  pip- 
ing, and  thus  these  materials  are  affected  and  their  life  limited 
by  the  piping  they  conceal. 

Decorative  features,  including  trim  of  all  kinds,  are  affected 

79 


Building  for  Profit 


by  what  supports  them,  and  thereby  affect  the  permanency  of 
the  support.  Tile,  terrazza,  and  cement  floor  surfaces,  which 
have  little  or  no  expansive  capacity,  are  laid  on  steel-framed 
supports,  which  are  capable  of  expansion.  One  portion  of  a 
modern  building  may  be  overheated  by  flues,  by  pipes  or  radi- 
ators, while  another  part  is  cold. 

After  a  building1  is  completed,  the  framing  is  heated  to  70°, 
while  the  exterior  may  be  zero.  The  interior,  therefore,  may 
rise,  and  expand  sidewise,  while  the  exterior  is  contracting  in 
both  directions,  by  which  process  the  building  face  is  minutely 
cracked,  either  in  the  joints  or  in  the  material. 

In  mechanical  appliances  a  new  feature  has  been  imported 
into  buildings  which,  bearing  no  inconsiderable  relation  to  the 
total  cost,  is  of  fragile,  impermanent  character.  We  do  not 
know  the  length  of  life  of  some  of  the  parts  of  the  equipment  of 
buildings,  but  we  are  aware  of  the  fact  that  much  of  it  is  sub- 
ject to  conditions  tending  toward  a  perishable  character,  due 
to  the  very  services  it  performs.  Sanitary  equipment  has  im- 
mensely increased  in  extent  and  expense,  yet  less  than  a  quarter 
of  a  century  has  brought  about  radical  changes  in  methods,  and 
has  demonstrated  the  perishability  of  some  materials,  which 
were  at  one  time  thought  to  be  of  the  very  highest  type  of 
permanency. 

-Mechanical  equipments  may  be  considered  in  two  parts- 
fixed  and  motive.  Fixed  equipments  are  largely  in  the  form  of 
piping,  for  a  variety  of  services  of  more  or  less  importance, 
affording  the  means  of  usage  of  electrical,  steam,  sanitary, 
water,  gas,  air,  and  vacuum  appliances.  Most  such  systems 
are  liable  to  become  superannuated  at  an  early  period,  being 
subject  to  the  course  of  progressive  invention  and  improvement, 
requiring  their  modification  or  alteration  in  order  to  secure  effi- 
cient results.  Such  changes  are,  however,  very  difficult  of  attain- 
ment, involving  serious  expenditures  and  disturbance  of  the 

80 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

structure,  not  only  on  account  of  the  amount,  but  of  the  general 
inaccessibility  of  piping. 

The  ramifications  of  such  systems  may  be  illustrated  by  those 
installed  by  the  writer  in  a  large  apartment-hotel,  the  extent  of 
which  is,  in  miles,  as  follows:  — 


Sanitary 15-8:  Refrigeration     ...  3.35 

Water 44.01  Pneumatic      ....  1.07 

Fire 2.11     Electric 39-2S 

Gas 37.30  Bells     ......  5.43 

Elevators 1.99  Flues  and  ducts  .     .     .  4.61 

Steam 18.56  Total  miles     .     .     .  173.57 

Even  one  of  the  minor  elements,  if  disturbed,  would  affect  a 
considerable  portion  of  the  builvding  materials. 

Motive  appliances  are  also  quite  extensively  installed  in  mod- 
ern buildings,  and  comprise,  elevators  and  engines,  ventilating- 
fans  and  motors,  refrigerating,  pumping,  and  electrical  gener- 
ating machinery.  The  life  of  such  apparatus  is  affected  largely 
by  the  rapidity  of  its  operation,  the  shocks  or  variable  loads  to 
which  it  is  applied,  and  also  to  some  extent  by  the  suitability  of 
its  proportions  to  the  work  to  be  performed  by  it. 

The  greater  the  effort  which  is  made  to  secure  economy  in 
operation,  the  greater  will  be  the  complexity  of  appliances ;  and 
the  trend  has  been  toward  a  multiplication  of  engineering  ap- 
paratus in  buildings.  These  introduce  into  the  structure  new 
features  tending  toward  physical  deterioration,  by  vibration, 
strain,  and  temperature.  In  electrical  apparatus,  not  only  have 
materials,  frail  in  themselves,  been  introduced,  but  a  new  ele- 
ment aiding  the  processes  of  decay  has  been  developed  in  elec- 
trolysis. Apparatus  such  as  the  elevator,  imposes  new  and 
irregular  strains  on  the  structure,  and  power  machinery  intro- 

81 


TABLE  F 
PHYSICAL  EXISTENCE  OF  MECHANICAL  APPARATUS 

Life  of  most  durable  part,  40  years 


I.    FIXED    EQUIPMENT 


Year 


Per 
cent. 


Most  durable  elements— steel  construction,  foundations, 

elevator  guides,  and  overhead  framing 40  100.0 

Exterior  framing,  copper-cased  housings,  etc.,  heating 

pipe  systems  used  part  of  the  year,  gas  piping     ...  33  82.5 

Buried  vents  and  ducts  when  painted 32  80.0 

Steel-plate  stacks  and  smoke-ducts,  cold-water  piping, 

electric  conduits 30  75.0 

Heating-boilers  used  part  of  year 28  70.0 

Roof-tanks,  sanitary  piping  systems 27  67.5 

Pressure  steam  piping  and  appliances 26  65.0 

Interior  drums  and  tanks,  hot-water  and  pneumatic  pip- 
ing    25  62.5 

Exposed  and  unpainted  vents  and  ducts 24  60.0 

Highest-class  pressure  steam-boilers 22  55.0 

Sanitary  fixtures,  refrigerating  piping,  kitchen  fixtures, 

and  valves 20  50.0 

Drip  and  drain  piping,  cheaper  class  of  pressure  steam- 
boilers  1 8  45.0 

Electric  switches,  wiring,  and  connections 15  37.5 

Exhaust  heads,  exposed  galvanized  ironwork,  hot-water 

drums 12  30.0 

II.    MOTIVE    APPLIANCES  Years         cpeenrt 

Slowest-speed  apparatus,  apparatus  intermittently  used  .     24        60.0 

Dumb-waiters,  switchboards,  elevator  gates,  slow-speed 
elevator  engines,  shafting  and  bearings,  slow-geared 
apparatus,  elevators  intermittently  used 22  55.0 

Motor-driven  pumps,  compressors,  and  moderate-speed 

fans 20  50.0 

Slow-speed  reciprocating  apparatus,  such  as  pumps,  ele- 
vator reversing  gear,  platform  lifts  17  42.5 

Elevators  in  regular  use,  laundry,  kitchen,  refrigerating, 
electric  devices,  and  other  apparatus  frequently  re- 
versed    i 6  40.0 

Moderate-speed  reciprocating  engines,  medium-speed 

rotary  apparatus,  dynamos  and  motors 15  37.5 

Fan  engines,  high-speed  rotary  apparatus  on  large  varia- 
tions of  loads,  dynamos,  motors,  high-pressure  en- 
gines, condensers 12  30.0 

High-speed,  high-pressure,  reciprocating  engines  and 

machines  on  extreme  variable  loads 10  25.0 

82 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

duces  vibrations,  while  boiler  plants  and  flues  increase  the 
effects  of  expansion  and  contraction. 

These  and  many  other  considerations  all  point  to  the  neces- 
sity for  equal  conservatism  in  assuming  a  life  for  those  less 
durable  features  which  affect  the  life  of  the  more  durable 
elements. 

Proceeding  along  such  lines,  we  may  reasonably  conclude 
that  the  life  to  be  assigned  to  the  mechanical  appliances  in  build- 
ings may  be  classified  as  shown  in  Table  F. 

The  mechanical  elements  in  a  building  may  be  related  to  the 
life  of  the  building  materials,  and  their  depreciation  combined 
therewith ;  but  as  the  life  of  mechanical  apparatus  is  relatively 
shorter,  it  would  appear  to  be  the  best  course  to  work  out  its 
rate  of  depreciation  independently,  and  assign  a  special  fund 
to  cover  it. 

The  fixed  and  motive  equipments  of  a  large  apartment  build- 
ing bear  relations  which  are  plotted  on  Fig.  13,  and  very  inter- 
estingly indicate  the  same  general  form  in  the  resulting  curve  as 
in  the  case  of  building  materials. 

Of  the  total  cost,  the  fixed  equipment  was  60%  and  the  motive 
apparatus  was  40%  of  the  cost  of  the  whole  equipment. 

The  combined  equipment  has  a  relative  life  compared  with 
that  of  its  most  durable  part,  which  has  been  assumed  to  be  such 
material  as  elevator  guides  and  fixed  ironwork,  of  40%. 

The  fixed  equipment  has  an  average  of 52.0% 

But  the  motive  apparatus  is  only 21.8% 

The  effect  of  the  motive  apparatus  is,  therefore,  the  greatest 
in  reducing  the  total  life  of  the  building.  The  cost  of  the  entire 
equipment  in  this  case  approximated  20%  of  the  total  cost,  and 
if  the  building,  upon  dissection  of  its  elements,  should  show, 
without  equipment,  a  mean  relative  life  of  77%,  then  the  intro- 
duction of  the  equipment  reduces  the  combination  to  70%,  or,  in 
other  words,  the  building  alone  would  have  a  mean  life  of  57^4 

83 


Building  for  Profit 


FIG.  13 


10 


20 


Scale  of  years 
30         35        40         45 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

years ;  but  this  would  be  reduced  by  the  effect  of  the  equipment 
to  52*^  years,  involving  on  each  one  million  dollars  of  total  in- 
vested value  an  annual  addition  to  the  necessary  sinking-fund 
for  depreciation  of  about  $7500  a  year. 

In  an  office  building  where  no  power  plant  is  installed,  but 
elevators  and  heating-boilers  are  included,  we  find  that  the  rela- 
tive life  of  this  equipment  is 45-7% 

The  building  without  the  equipment  is  .     .     .     .     .     .     77-O% 

and  the  effect  of  the  equipment  is  to  reduce  this  to    .     .     74.7 r< 
In  a  dry-goods  building  the  investment  in  the  equipment  and  in 
•  a  power  plant  was : 

For  the  fixed  equipment,  elevators,  sprinklers,  and  boilers 
for  heating  ....     20%  of  the  cost  of  the  building 

For  the  motive  apparatus,  or  generating 

plant 6%  of  the  cost  of  the  building 

The  relative  life  of  building  alone  being    .     .  •  .     .     77.00% 

The  relative  life  of  fixed  equipment  is *    52.00% 

Thus  the  building  and  fixed  equipment  average  .     .     73.00% 
The  relative  life  of  the  motive  plant  is,  however,  only     18.00% 
Reducing  the  average  relative  life  of  all  to    ...     70.25%- 
and  reducing  the  mean  life  of  the  whole  by  about    .       9.00% 
and  increasing  the  proportionate  sinking-fund  by 

about 20.00% 

The  introduction  of  delicate  and  short-lived  machinery  into 
buildings,  therefore,  affects  not  only  the  proportion  of  funds  for 
its  own  replacement,  but  that  covering  the  duration  of  life  of  the 
entire  structure. 


II.  ECONOMIC  DETERIORATION  OF  EQUIPMENT 
IN  BUILDINGS 

THE  economic  as  well  as  the  physical  depreciation  of  buildings 
involves  the  deterioration  of  their  equipments .  or  mechanical 

85 


Building  for  Profit 


appliances,  which  to-day  form  no  small  part  of  their  first  cost, 
and  constitute  some  of  the  largest  items  of  expenditure  in  their 
operation. 

The  effect  is  felt  in  fixed  apparatus  and  in  motive  appliances, 
but  the  latter  are  subject  to  more  rapid  effects.  With  regard  to 
this  part  of  modern  buildings,  a  personal  occupation  during  a 
third  of  a  century  has  afforded  the  means  of  observation  of  the 
progress  of  economic  deterioration  in  both  classes  of  apparatus. 
While  physical  deteripration  of  equipments  has  usually  received 
consideration,  the  subject  of  depreciation  in  economic  value  has 
received  less  attention,  with  unsatisfactory  results  which  have- 
adversely  affected  some  building  investments.  If  no  fund  is 
regularly  apportioned  or  laid  aside  for  the  purpose  of  replace- 
ment of  apparatus  on  reaching  the  inefficient  or  uneconomic 
condition,  the  day  of  reconstitution  or  replacement  is  unduly 
delayed,  and  costs  of  operation  become  excessive. 

Many  instances  of  this  nature  could  be  cited  and  may  to-day 
be  observed ;  one  or  two  must  here  suffice. 

A  large  office  building  constructed  twelve  years  ago  was 
equipped  with  elevators  of  a  type  which  at  that  time  was  advo- 
cated as  of  the  highest  known  efficiency.  A  considerable  amount 
over  and  above  the  cost  of  other  then  applicable  forms  was  paid 
for  these  appliances.  From  the  first  they  proved  expensive  in 
physical  upkeep,  and  this  cost  has  advanced  with  age  at  an  in- 
creasing ratio,  which  is  provided  for  by  the  usual  methods.  But 
the  property  has  suffered  also  by  their  ineffective  service,  and  is 
to-day  operated  at  an  increasing  cost  by  reason  of  growing  in- 
efficiency of  the  machines.  The  result  is  that  the  building's 
renting  credit  has  suffered,  and  rentals  are  not  what  its  position 
and  importance  would  appear  to-day  to  justify.  Had  a  sinking- 
fund  been  established  at  the  time  of  installation,  money  would 
have  been  in  hand  toward  the  replacement  of  the  apparatus 
with  up-to-date  appliances. 

Since  the  foregoing  was  written  electric  elevators  of  effective  and  economic  type 
were  installed,  affording  a  more  efficient  service.  A  direct  increase  resulted  in 
the  rentals  of  the  building  which  covered  the  entire  cost  of  elevator  reconstruction 
in  less  than  two  years.  The  subject  of  adequate  elevator  service  and  the  economic 
proportioning  of  elevator  installations  is  laid  down  in  detail  in  "Elevator  Service." 

86 


"The  vast  ramification  of  piping  buried  within  the 
construction  of  modern  buildings" 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

The  deterioration,  both  physical  and  economic,  of  fixed  equip- 
ment in  buildings,  which  largely  consists  of  piping  systems,  is 
an  element  which  has  not  come  into  much  notice,  as  the  multipli- 
cation of  services  provided  by  their  means  is  of  comparatively 
recent  introduction.  But  it  is  a  fact  that  the  growth  of  the  uses 
and  demands  for  pipe  systems  has  been  accompanied  by  a  radical 
reduction  in  their  permanency,  for  the  material  of  wrhich  much 
of  the  vast  ramification  of  piping  is  composed,  and  which  has 
been  buried  within  the  construction  of  modern  buildings,  is  not 
of  the  substantial  character  which  was  at  one  time  obtainable. 
As  an  instance  may  be  cited  the  experience  of  one  large  mod- 
ern hotel,  in  which  a  considerable  proportion  of  the  sanitary 
piping  has  been  recently  replaced  under  difficult  and  expensive 
conditions. 

Remodeling  operations  in  a  number  of  buildings  have  af- 
forded opportunities  of  similar  observations. 

The  proportion  of  cost  which  the  modern  equipment  bears 
to  the  total  cost  of  a  building  varies  with  the  elaborateness  of 
each,  but  may  be  expected  to  involve  not  less  than  from  9  to 
15%  of  the  whole  cost  of  the  structure  when  unaccompanied  by 
power  machinery,  and  when  the  latter  is  included,  to  involve 
from  1 6  to  26*70  of  the  total.  The  economic  deterioration  of 
these  appliances  and  apparatus  is  more  rapid  than  in  the  case  of 
the  building  they  occupy,  and  may  be  greatly  accelerated  by 
maldesign  or  poor  construction. 

In  allotting  the  periods  of  effective  or  economic  existence  to 
such  equipments,  the  results  of  actual  experience  and  observa- 
tion again  must  be  the  guide,  reinforced  by  knowledge  of  the 
extent  of  usage  and  the  character  of  their  operation. 

The  results  of  such  observations  are  embodied  in  Table  G,  in 
which  the  arrangement  of  motive  apparatus  is  in  the  order  of 
rapidity  of  operation,  a  feature  which  has  a  greater  effect  on 
physical  and  economic  deterioration  than  mere  continuity  of 


Building  for  Profit 


operation.    It  is  needless  to  add  to  the  table  the  effect  of  cheap- 
ness or  poverty  of  construction  in  every  class  included  in  the  list. 

From  the  table  the  conclusion  may  be  reached  that  the  average 
economic  life  of  fixed  equipment  is  about  one  half  the  aver- 
age effective  life  of  the  buildings  it  occupies,  which  agrees 
with  many  observable  conditions.  In  other  words,  the  fixed 
equipment  requires  reconstitution  to  an  efficient  point  at  least 
once  during  the  effective  life  of  a  building,  unless  the  rate  of 
general  deterioration  of  the  whole  is  to  be  accelerated,  or,  other- 
wise stated,  if  the  equipment  be  not  brought  "up  to  date"  at 
least  once  during  the  effective  life  of  the  building,  the  general 
life  of  the  investment  is  reduced. 

Here  again  the  reader  must  be  reminded  that  the  mere  length 
of  existence  of  such  appliances  is  not  the  question.  There  are 
to-day  in  existence  mechanisms  which  have  been  in  operation  of 
a  certain  sort  for  a  century,  a  life  which  may  by  some  surround- 
ing circumstances  be  even  further  prolonged.  But  the  effective 
earning  existence  of  all  apparatus  is  a  different  matter,  and  in 
the  case  of  appliances  installed  in  buildings  operated  for  profit, 
the  results  of  ineffective  service  may  be  and  are  much  greater 
than  mere  mechanical  inefficiency  would  represent  under  other 
conditions. 

For  the  successful  operation  of  high  buildings  the  elevator 
forms  an  integral  part  of  the  building.  The  physical  deteriora- 
tion of  this  part  of  the  equipment  is  compound,  consisting  of 
that  due  to  the  fixed  portion  of  the  construction,  the  hoistway— 
guides  and  beams— and  that  of  the  motive  portion  or  engine 
with  accompanying  apparatus,  such  as  valves,  gears,  wheels, 
bearings,  drums,  shafts,  ropes,  and  motors. 

An  adequate  number  of  such  appliances,  providing  not  only 
an  ample  but  an  easily  operated  service,  will  have  a  longer  phy- 
sical life  than  one  in  which,  by  a  shortage  of  machines,  the  ser- 
vice becomes  severe,  involving  heavy  loads,  frequent  reversals, 

88 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

TABLE  G 
ECONOMIC  EXISTENCE  OF  MECHANICAL  APPARATUS 

I.    FIXED  EQUIPMENT  Life  in 

years 

Steel  construction,  foundations,  elevator  guides,  and  overhead  fram- 
ing   30 

Exterior  framing,  copper-cased  housings,  heating  pipe  systems  used 

part  of  the  year,  gas  piping 27 

Buried  vents  and  ducts  when  painted 26 

Steel-plate  stacks  and  smoke-ducts,  cold-water  piping,  electric  con- 
duits    24 

Heating-boilers  used  part  of  year 22 

Roof-tanks,  sanitary  piping  systems 21 

Pressure  steam  piping  and  appliances,  interior  drums  and  tanks,  hot- 
water  and  pneumatic  piping 20 

Exposed  and  unpainted  vents  and  ducts 19 

Highest-class  pressure  steam-boilers 17 

Sanitary  fixtures,  refrigerating  piping,  kitchen  fixtures,  and  valves    .  16 

Drip  and  drain  piping,  cheaper  class  of  pressure  steam-boilers  ...  14 

Electric  switches,  wiring,  and  connections n 

Exhaust  heads,  exposed  galvanized  ironwork,  hot-water  drums     .     .  9 

II.      MOTIVE  APPLIANCES 

Slowest-speed  apparatus,  apparatus  intermittently  used 20 

Dumb-waiters,  switchboards,  elevator  gates,  slow-speed  elevator  en- 
gines, shafting  and  bearings,  slow-geared  apparatus,  elevators  in- 
termittently used 1 8 

Motor-driven  pumps,  compressors,  and  moderate-speed  fans    ...       17 

Slow-speed  reciprocating  apparatus,  such  as  pumps,  elevator  revers- 
ing gear,  platform  lifts 15 

Elevators  in  regular  use,  laundry,  kitchen,  refrigerating,  electric  de- 
vices, and  other  apparatus  frequently  reversed 14 

Moderate-speed  reciprocating  engines,  medium-speed  rotary  appa- 
ratus, dynamos  and  motors 12 

Fan  engines,  high-speed  rotary  apparatus  on  large  variations  of  loads, 
dynamos,  motors,  high-pressure  engines,  condensers 9 

High-speed,  high-pressure,  reciprocating  engines  and  machines  on 
extreme  variable  loads 7 


Building  for  Profit 


and  general  wear  and  tear.  The  elevator,  like  any  other  moving 
apparatus,  requires  constant  care  and  minute  supervision  to 
maintain  it  in  thorough  serviceable  order.  If  all  the  elevators 
in  a  building  are  in  constant  urgent  use,  there  is  not  available 
time  for  this  work  of  upkeep  to  be  properly  effected. 

The  effective  life  of  much  of  the  appliances  is  thus  reduced, 
and  its  upkeep  is  at  the  same  time  rendered  burdensome  as  well 
as  a  source  of  much  anxiety  to  those  charged  with  its  mainte- 
nance. But  apart  from  the  foregoing,  the  economic  side  of  the 
matter  requires  an  ample  provision  of  elevators  in  a  building, 
inasmuch  as  inadequate  or  irregular  service  directly  affects  the 
rentable  value  of  the  upper  floors,  which  are  totally  dependent 
for  access,  in  lofty  structures,  upon  the  elevators. 

The  economic  life  of  the  apparatus  is,  moreover,  affected  by 
the  march  of  mechanical  improvement,  and  an  elevator  installa- 
tion maintained  in  excellent  condition  may  be  properly  aban- 
doned in  favor  of  another  affording  greater  efficiency  in  service 
and  perhaps  in  cost  of  operation.  It  cannot  be  assumed  that  the 
effective  life  of  an  elevator  installation  is  equal  to  that  of  the 
building  it  serves,  and,  in  fact,  the  evidence  of  past  experience 
in  this  line  is  to  the  effect  that  this  part  of  the  motive  appliances 
must  be  reconstituted  at  least  once  and  perhaps  twice  during  the 
period  of  effective  life  of  the  building. 

This  has  been  the  case  in  a  number  of  instances.  In  the  build- 
ing in  which  one  of  the  earliest  forms  of  hydraulic  elevator  was 
installed,  the  apparatus  was  replaced,  after  about  seventeen 
years  of  service,  by  others  of  more  modern  hydraulic  pattern. 
But  it  is  reasonable  to  suppose  that  in  another  equal  period, 
should  the  building's  existence  be  so  prolonged,  another  re- 
placement by  still  better  appliances  will  take  place. 

The  steam-driven  machines  in  several  office  buildings  saw 
service  of  approximately  a  similar  length  of  time,  so  that  a 
period  of  about  twenty  years  certainly  has  covered  the  life  of 

90 


''Extending  this  existence  by  reconstruction  may  be  of  so  expensive  a  nature 
and  of  so  limited  an  effect,  that  replacement  may  be  preferable" 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

such  apparatus  in  the  past,  and  there  is  no  reason  to  anticipate  a 
greater  length  of  economic  life  in  the  future.  On  the  contrary, 
in  elevator  engines,  as  in  other  lines  of  development,  modern 
devices  nearly  always  take  the  direction  of  high  speed,  which  in 
itself  contributes  to  physical  deterioration.  An  ample  number 
of  elevators,  of  moderate  speed  and  moderate  size  of  cars,  is  the 
best  form  of  economic  investment  in  this  important  part  of 
building  equipment. 

A  noticeable  feature  in  connection  with  equipment  is  the  in- 
crease in  the  demand  which  arises  as  time  proceeds,  and  which 
directly  affects  the  economic  side  of  the  investment. 

The  apparatus,  which  is  originally  designed  or  purchased  for 
a  given  service  or  combination  of  services,  is  not,  by  the  process 
of  use  and  age,  improved  in  its  capacity  to  respond  to  this  in- 
creased demand,  and  it  therefore  often  happens  that  efficiency 
decreases  at  a  ratio  accelerated  by  these  two  causes. 

This  is  an  effect  specially  noticeable  in  boilers,  the  working 
value  of  which  is  decreased  directly  by  age  and  accompanying 
reduction  of  allowable  pressure,  and  indirectly  by  irregular 
usage  and  wear  and  tear,  so  that  an  increased  demand  for  out- 
put comes  upon  a  weakened  and  aged  appliance  incapable  of 
efficient  response.  Further,  when  the  power  thus  generated  has 
been  planned  to  operate  machinery  with  a  given  economic  pres- 
sure, the  lowering  of  that  pressure  adversely  affects  the  economy 
of  the  machinery. 

A  boiler  when  installed  may  have  an  allowable  working  pres- 
sure of  100  pounds  per  square  inch,  and  the  engines  it  supplies 
do  their  work  best  and  most  economically  with  that  pressure. 
As  time  proceeds,  the  boiler  itself  becomes  less  efficient  by  leaky 
setting,  by  fouled  and  choked  smoke-passages,  and  by  scaled 
interior,  and,  to  cap  these  deficiencies,  the  local  inspector  re- 
duces the  allowable  working  pressure.  The  engines  are  there- 
fore supplied  at  less  pressure,  reducing  further  as  time  proceeds, 


Building  for  Profit 


and  their  product  is  affected  in  both  quantity  and  economy,  until 
some  point  is  reached  in  the  scale  where  the  owner  is  compelled 
to  undertake  rebuilding  or  replacement. 

The  operation  of  extending  this  existence  by  remodeling,  by 
reconstruction,  or  by  additional  apparatus  may  be  of  so  expen- 
sive a  nature,  and  of  so  limited  an  effect,  that  their  entire  recon- 
struction or  replacement  may  be  economically  preferable. 

Radical  remodeling,  involving  more  or  less  reconstruction, 
may  bring  the  appliance  up  to  reasonable  mechanical  efficiency, 
yet  may  not  bring  it  to  the  point  of  full  effectiveness  to  meet  the 
growth  of  demands  for  its  work.  Therefore  the  conservative 
practice  will  be  to  set  aside  an  annual  percentage  of  value  which 
will  cover  complete  replacement  within  the  period  of  effective 
earning  existence,  so  that  provision  may.be  made  in  advance  for 
such  contingencies  as  have  been  referred  to,  which  percentage 
can  be  readily  ascertained  by  reference  of  any  item  to  the  cor- 
responding rate  of  compound  interest  in  Table  E. 

As  regards  the  life  of  usefulness  of  power-generating 
machinery,  the  further  consideration  must  be  applied  that  the 
commercial  value  of  such  apparatus  ends  as  soon  as  the  cost  of 
its  operation  reaches  the  price  at  which  its  output  could  be  pur- 
chased from  another  source  of  supply  or  supplied  by  some  other 
substitute. 

Lenders  of  money  upon  security  of  improved  real  estate  some- 
times demand  the  installation  of  machinery  therein,  regarding 
it  as  a  part  of  their  security ;  but  the  value  of  motive  machinery 
in  such  a  connection  is  discounted  by  its  relatively  short  period 
of  useful  existence  and  by  the  probability  of  necessary  replace- 
ment more  than  once  during  the  life  of  the  structure.  More- 
over, the  mortgageable  value  of  such  apparatus,  even  if  re- 
garded as  part  of  the  building,  is  but  second-hand  value  as  soon 
as  it  is  put  in  operation. 

92 


Depreciation  of  Mechanical  Equipments  and  Power  Plants 

If  a  mortgage  or  bond  is  secured  in  part  upon  motive  appli- 
ances, that  part  of  the  security  declines  at  a  much  more  rapid 
rate  than  the  building,  and  would  seem  to  require  the  establish- 
ment of  a  special  and  regularly  invested  sinking-fund  in  order  to 
maintain  its  stability,  since  the  relative  life  of  motive  appliances 
as  compared  with  that  of  the  building  is  only  from  20  to  27%. 


93 


VI 
COST  OF  OPERATING  BUILDINGS 

THE  details  entering  into  the  operation  of  a  building  and 
composing  its  cost  are  not  always  accessible,  on  account 
of  the  natural  hesitancy  of  owners  to  afford  informa- 
tion as  to  their  expenditures. 

It  would  seem,  however,  that  the  publication  of  statistics, 
comparing  costs  of  operation  in  percentages  of  the  rentals,  such 
as  those  recently  compiled  by  C.  T.  Coley,  M.E.,  would  be  of 
general  advantage,  creating,  as  they  would,  a  greater  interest  in 
the  subject,  and  directing  attention  to  certain  elements  upon 
which  relief  or  improvement  might  be  especially  desirable. 

If,  for  instance,  it  should  develop  that  in  certain  classes  of 
buildings  some  practice  was  common  which  was  productive  of 
undue  expense,  or  some  burden  was  unfairly  or  unevenly  laid 
upon  them,  the  comparison  of  details  would  doubtless  tend  to 
bring  about  an  economic  modification  to  the  advantage  of  own- 
ers of  such  properties. 

The  best  method  of  comparison  seems  to  be  that  of  the  rela- 
tion of  each  item  to  the  gross  rental,  which  brings  out  very 
clearly  the  burden  laid  upon  the  ownership  for  each  element  of 
outlay  and  gives  its  direct  bearing  upon  the  returns,  and  through 
the  returns,  upon  the  capitalized  value  of  the  investment.  A 
comparison  and  study  of  a  number  of  actual  instances  affords 
the  following  approximate  averages  as  classified  in  Table  H. 

In  examining  the  outgoing  expenses  upon  any  class  of  im- 
proved property,  the  largest  item,  and  that  which,  therefore, 
naturally  first  attracts  attention,  is  taxation. 

Any  system  by  which  taxes  are  raised  in  this  country  must,  to 

94 


rt 

•4-> 

Si 


J-i     O 


o  .« 

I  I 

rt    ^ 

<U     S 

1.       W 

o 

"  *+* 

~   o 

V)     C 


Cost  of  Operating  Buildings 


meet  popular  views,  be  such  as  will  conceal  the  contributions  of 
the  general  public,  among  whom  there  appears  to  exist  a  general 
and  deep-seated  objection  to  a  direct  form  of  taxation.  Conse- 
quently, the  main  burden  of  city  taxation  is  laid  upon  real  prop- 
erty, and  becomes  a  first  charge  thereon,  taking  a  prior  position 
to  any  lien  or  mortgage,  either  of  land  or  building  thereon. 


TABLE  H 

AVERAGED  OPERATING  EXPENDITURES 
Classified  in  percentages  of  rentals 


Item 


Business  or 

office 


Lofts  and 
warehouses 


Elevator 
apartments 


Flats 


FIXED   CHARGES 

Taxation      ....  15.5                17  12.2               13 

Insurances  ....     0.7                  1.6  1.6                  1.7 

Water  tax   ....    0.6                 Q-75  i-5                 2.0 

Total 16.8  19.35  15.3                 16.7 

MAINTENANCE 

Management    .     .     .     5.3  4  3  2.75 

Upkeep  and  decora- 
tion       2.4  3.5  ii  12 

Cleaning  and  janitor     7.3  0.25  4.7  4.25 

Total 15.0  7.75  18.7  19 

CONVENIENCES 

Elevator       ....  9  8.5  6.5                .... 

Heat  and  hot  water .  2.8  3.3  8.5                10 

Public  lights     ...  2.2  i.i  2.8                   1.6 

Total 14  12.9  17.8                  1 1. 6 

EXTRAS 

Light 4-2  3-5  4-8  

Refrigeration  or  iced 

water 0.6  ....  7.0  .... 

Vacuum  cleaning      .  0.9  ....  1.8  .... 

Total "  5-7  "  3-5  J3-6   "  ... 

Gross  totals     ...  51.5  43.5  65.4  47.3 

All  the  items  included  in  operating  expenditures  have  increased,  so  that  the  propor- 
tion which  the  present  expenditures  bear  to  the  present  increased  rentals  has  not 
substantially  changed  from  those  previously  existing,  as  shown  above. 

95 


Building  for  Profit 


Unequal  results  of  present  taxation  seem  to  be  due  largely  to 
the  old  practice  of  assessing-  values  inclusive  of  the  improve- 
ment, but  in  New  York  City  the  commendable  work  of  the 
assessing  authorities  is  now  in  the  direction  of  establishing  a 
separate  value  for  the  land  and  a  separate  value  for  the  building. 
It  will  perhaps  be  thought  that  such  valuation  would  settle  the 
question,  but  it  will  not  do  so  fully  unless  it  takes  into  account 
the  depreciation  of  the  structure,  which  is  continuously  reduc- 
ing in  permanency  if  not  in  earning  capacity. 

If  the  assessments,  so  far  as  the  building  is  concerned,  should 
be  based  on  valuation  at  its  full  earning  capacities,  they  would 
have  to  follow  the  course  of  the  earnings  of  the  building,  which 
would  present  a  shifting  and  deteriorating  basis,  so  that  a  very 
moderate  assessable  value  on  the  building  would  naturally  be 
established,  which  would  provide  in  advance  for  its  deteriora- 
tion, while  the  land  might  safely  be  taxed  nearer  to  its  full 
value. 

It  may  be  observed  that  at  present  no  other  class  of  invest- 
ment makes  contributions  to  municipal  purposes  similar  to  those 
of  real  estate.  The  budget  of  1910  for  the  city  of  New  York 
amounted  to  $163,130,270.  Of  this  amount,  $131,099,280  is 
raised  by  taxation,  of  which  real  estate  contributes  $124,540,- 
732,  or  95%,  while  personal  property  furnishes  only  $6,558,548, 
or  5%. 

The  increase  of  the  tax  rate  is  ten  points,  added  to  the  increase  of 
assessed  valuation,  which  is  five  points,  so  that  the  taxpayers'  bills 
have  increased  since  last  year  at  the  rate  of  fifteen  points.  While 
taxes  are  thus  increasing,  the  income  produced  by  real  estate  does  not 
grow,  at  least  not  at  the  same  rate.  Within  a  year  or  two  the  entire 
revenue  of  the  city  will  depend  on  real  estate,  as  the  tendency  of  the 
present  administration  to  abolish  taxes  on  personalty  will  probably 
be  successful.  The  irresistible  tendency  to  increase  public  expenses, 

96 


Cost  of  Operating  Buildings 


at  the  same  time  disregarding  the  revenue  of  the  municipality,  places  a 
growing  burden  on  property-owners. 

Unfortunately  it  must  be  added  that  no  other  contribution  is 
at  present  exacted  with  like  degree  of  uncertainty  and  in- 
equality. 

That  this  is  the  case  is  generally  understood,  but  the  extent  of 
the  variation  may  be  worth  illustrating,  as  is  done  in  the  accom- 
panying tabulations  of  taxation  in  typical  buildings  in  Man- 
hattan. 

RELATION  OF  TAXATION  TO  RENTALS  AND  VALUES 

NEW  YORK  CITY 


Building 

Case 

Per  cent,  of 
book  value 

Percent,  of 
gross  rental 

Per  cent,  of 
net  income 

Offices    

I 

1.88 

17  .  20 

39.6 

Offices    

2 

1.58 

15  .02 

31  .O 

Offices    

3 

i  .23 

iS.IO 

35.  2 

Offices    

4 

i  .07 

II.80 

23.8 

Mean       

1  S  .  =;O 

Lofts      

i 

1.4.^? 

2O.  I  C 

^Q  .  ^ 

Lofts      
Lofts      

2 
3 

I  .40 
I  .  T* 

I4.IO 
IQ  .  OO 

31-3 
18.0 

Lofts      

4 

I  .  1O 

I  S  .  IO 

24.  7 

Mean       

i  7  .  oo 

Apartments     .... 
Apartments     .... 
Apartments      .... 
Apartments     .... 

i 

2 

3 
4 

2.10 

»-95 

i  .  26 

°-73 

16.  70 
13.00 
9.70 
9.48 

i8.7 

16.8 

14.7 

20.5 

Mean       

12     22 

General  average   .     . 

1-43 

15.00 

27.8 

Much  of  the  irregularity  in  taxation  is  due  to  the  failure  of  both  owners  and  asses- 
sors to  take  into  account  variations  in  earning  capacity  and  consequent  effect  on 
economic  value.  If  assessed  values  be  utilized  as  a  basis  for  computing  fair 
rentals,  it  would  become  the  interest  of  the  owner  as  well  as  of  the  assessing 
authorities  to  determine  and  uphold  a  fair  value  of  land  and  building.  Or  in- 
versely, if  assessments  took  into  consideration  the  earning  capacity  upon  which 
value  really  depends,  the  assessment  might  fluctuate  but  would  be  nearer  actual 
market  value.  Under  such  circumstances,  owners,  assessors,  tenants,  and  investors 
would  be  unitedly  interested  in  the  subject. 

Q7 


Building  for  Profit 


This  comparison  of  contributions  by  improved  real  estate  to 
public  expenditures  shows  how  much  the  maintenance  or  in- 
crease of  taxation  upon  the  gradually  reducing  value  of  build- 
ings may  affect  their  capital  value  or  even  accelerate  their 
demise. 

It  will  be  seen  from  an  examination  of  these  statistics  that  the 
owners  of  these  Manhattan  properties  are  in  partnership  with 
the  community  to  a  very  substantial  extent,  for  upon  the  net 
returns  the  average  owner  is  called  upon  to  share  nearly  one 
third  of  his  entire  income  with  the  city  in  the  form  of  taxes,  and 
such  are  the  inequalities  that  while  a  more  fortunate  neighbor 
may  be  paying  no  more  than  15%  of  his  income,  another  may  be 
parting  with  no  less  than  an  amount  equal  to  40%  of  the  net 
returns  from  his  property. 

A  system  of  public  taxation  which  involves  a  tenth  of  the 
entire  earning  capacity  of  a  property  may  or  may  not  be  re- 
garded as  burdensome,  but  when  it  is  so  unequal  as  to  involve  in 
a  similar  property  double  that  proportion,  it  cannot  be  consid- 
ered to  be  based  on  an  entirely  satisfactory  system  of  allotment. 
Nor  does  its  present  adjustment  appear  to  much  better  advan- 
tage when  regarded  from  the  point  of  view  of  comparison  with 
the  total  invested  value,  for  we  find  that  where  one  property 
gets  off  with  a  rate  of  less  than  ^4  of  I  %  per  annum,  another  of 
the  same  class  is  loaded  with  three  times  that  rate. 

If  these  buildings  may  be  considered  representative  of  present 
average  conditions  in  respect  of  taxation — and  there  seems  no 
reason  to  doubt  that  other  instances  would  confirm  them — we 
find  that  the  annual  contribution  made  by  the  ownership  of 
such  improved  properties  to  the  support  of  the  city  expenditures 
varies  from  ^  of  i%  up  to  2%  of  the  total  value,  from  10  to 
20%  of  the  entire  incomes,  and  from  15  to  40%,  or  an  average 
of  27%,  of  the  net  returns  from  the  investment. 

Any  system,  therefore,  which  takes  no  account  of  the  eco- 


Cost  of  Operating  Buildings 


nomic  deterioration  or  decreasing  earning  capacity  of  any  build- 
ing, but,  in  spite  of  these  elements,  fixes  or  raises  their  contri- 
bution by  empirical  assessed  valuation,  must  tend  to  render 
some  improved  real  estate  unproductive,  and  therefore  unat- 
tractive to  capital. 

It  is  of  course  to  be  conceded  that  the  burden  of  this  taxation 
is  ultimately  borne  by  the  lessee,  tenant,  or  rent-payer,  who  is 
the  real  taxpayer.  But  while  that  is  the  case,  it  also  follows 
that  when  a  point  is  reached  at  which  the  contribution  of  the 
property  is  on  an  undue  scale  or  is  raised  beyond  that  which  can 
be  levied  upon  the  occupants,  not  only  the  burden  of  reduced  in- 
come, but  a  loss  of  capitalized  value,  falls  directly  upon  the  prop- 
erty-owner, so  that  undue  increase  of  assessed  value,  in  the  face 
of  the  deterioration  of  a  building  or  depreciation  of  its  rentals, 
effects  a  direct  reduction  of  the  commercial  value  of  the  prop- 
erty, and  by  such  action  the  State  or  city  indirectly  reduces  its 
own  credit. 

Tenants  of  buildings,  particularly  the  large  part  of  our  popu- 
lation who  live  in  apartments  and  community  business  buildings, 
have  a  common  interest  in  this  subject.  Their  usual  happy-go- 
lucky  view  of  the  matter  is  to  ignore  it  altogether,  or  blindly  to 
assert  that  they  are  not  taxpayers. 

As  a  matter  of  fact,  the  majority  of  rent-paying  citizens  pay 
taxes  twice  over.  Of  the  rentals  paid  in  their  homes,  from  10 
to  17%  applies  to  this  purpose,  and  of  the  rentals  paid  for  their 
places  of  business,  from  12  to  20%.  This  comes  more  directly 
to  view  when  the  proportion  is  related  to  the  rental  paid,  and  is 
also  apportioned  to  the  room  occupied,  as  in  the  accompanying 
instances  from  actual  circumstances  in  Manhattan. 

If  the  proportion  of  the  tax  to  the  rent  could  be  uniform,  then 
a.  tenant  would  know  just  what  his  or  her  contribution  to  the 
city  amounted  to;  but  concealed  in  the  rent  is  an  unequal  and 
often  disproportionate  share  of  the  general  burden. 

99 


Building  for  Profit 


TAXATION  PER  OCCUPIED  ROOM  PER  AXXUM 


Character 

Per  cent, 
of  rent 

Per  room 
per  annum 

7-story  high-class  apartment    
/-story  high-class  apartment   

9.48 

16  .  70 

$l8.OO 

30   oo 

8-story  modern  apartment   

I  -l  .  OO 

18    c;o 

8-story  modern  apartment   

0.  7o 

I  7  .  7O 

5-story  new-law  flats  

I  7,  .  OO 

8    cc 

5-story  cold-water  tenement     

I  1  .  HO 

8.^0 

5-story  cold-water  tenement     

i  5  .00 

9.58 

Average     

I  2     QO 

Being  somewhat  more  than  one  and  one  half  months'  rent, 
sometimes  two  months'  rent. 

If  this  feature  were  more  fully  understood,  it  is  probable  that 
a  very  lively  interest  would  be  evinced  by  tenants  in  the  question 
whether  their  share  of  taxation  was  on  an  equality  with  that  of 
their  neighbors,  and  a  more  general  interest  in  the  matter  of 
taxation  charges  would  be  awakened,  which  might  be  expected 
to  lead  to  an  understanding  of  the  principle  that  the  building 
exists  for  the  purpose  of  establishing  the  value  of  the  site,  and 
that  the  earning  capacity  of  buildings  is  the  measure  of  the 
commercial  value  of  the  land  on  which  they  stand,  and  that, 
while  it  may  be  fulfilling  this  purpose,  the  building  itself  may  be 
and  generally  is  a  fluctuating  and  decreasing  quantity,  the  value 
of  which  is  not  determinable  for  taxation  purposes  with  positive 
definiteness. 

The  relation  which  expenditures  upon  fixed  charges  and 
those  which  may  be  classified  as  Maintenance  and  Conveniences 
bear  to  the  total  income  obtainable  from  the  building  is  illus- 
trated by  Fig.  14,  which  in  diagrammatic  form  represents  both 

100 


Cost  of  Operating  Buildings 


FIG.  14 


OPERATING  EXPENDITURES 
IN  PER  CENT  OF  GROSS  INCOME 

A:  Conveniences 
B:  Maintenance 
C:  Fixed  Charges 


80 


70 


65 


60     E 
o 


50 


45 


40  a. 


35 


T3 

30     £ 
Q. 


25 


Lofts 


B 


B 


Offices 


Apartments 


20 


10 


101 


Building  for  Profit 


the  highest  and  lowest  observed  expenditures  for  each  item  of 
operation  as  detailed  in  Table  H,  from  which  the  limits  within 
which  they  may  be  expected  to  fall  are  readily  visible,  and 
demonstrate  the  fact  that  the  more  economical  results  are  shown 
by  buildings  in  which  the  lesser  extent  of  Conveniences  is  af- 
forded gratuitously  to  tenants. 

This  indicates  that  investments  in  buildings  may  frequently 
suffer  by  reason  of  burdens  laid  upon  them,  sometimes  by  com- 
petition, sometimes  by  mistaken  ideas  as  to  their  necessity, 
which,  in  the  form  of  conveniences,  are  offered  gratuitously  in 
order  to  draw  tenants  to  the  buildings.  That  these  conveniences 
are  too  often  afforded  at  unreasonable  cost,  or  at  the  expense 
of  the  financial  success  of  the  building,  will  be  seen  on  further 
examination  of  the  subject. 

It  is  not  to  be  assumed  that  these  and  the  following  remarks 
are  adverse  to  the  introduction  of  modern  improvements  or  ad- 
vantages, but  to  their  unconsidered  introduction,  to  the  methods 
of  their  operation,  and  to  the  undue  expenditure  of  capital  upon 
them,  regardless  of  the  effect  of  time  upon  their  value. 

Advantages  of  light,  air,  and  space,  of  interior  division  and 
plan,  of  decoration  and  artistic  construction,  are  very  desirable 
if  they  are  the  direct  means  of  securing  earnings.  But  construc- 
tional and  decorative  details  involving  undue  expenditure,  both 
in  first  cost  and  in  upkeep,  are  burdensome  after  their  original 
effect  has  worn  off  or  has  become  discounted  by  comparison 
with  others,  and  there  are  many  details  of  architecture  and  of 
constructive  planning  which  carry  with  them  a  direct  permanent 
annual  burden  of  upkeep  and  repair  out  of  proportion  to  their 
attractiveness  to  tenants.  Interior  redecoration  is  an  increasing 
item  of  cost  which  the  migratory  habits  of  tenants  impose  on 
the  management  of  residential  buildings,  which  indicates  the 
need  for  very  careful  limitation  of  original  outlay  in  this  direc- 
tion. 

102 


Cost  of  Operating  Buildings 


Considerable  interest  has  been  of  recent  years  shown  by 
managers  of  buildings  in  the  subject  of  economies  in  the  items 
entering  into  operating  costs.  Those  coming  under  the  head  of 
maintenance  include  exterior  and  interior  building  repairs 
and  redecoration,  house-cleaning  and  window-cleaning,  house 
labor  of  all  kinds,  disposal  of  rubbish,  and  many  other  minor 
items,  and  are  fortunately  receiving  a  commendable  detailed 
attention  largely  due  to  the  interchange  of  information  thereon. 

These  items  must,  however,  be  in  the  main  regarded  as  neces- 
saries, where  the  owner  of  property  undertakes  to  maintain  the 
building  for  the  occupancy  of  a  number  of  tenants. 

The  remaining  element,  or  conveniences,  consists  of  the 
operation  of  mechanical  or  engineering  equipment  provided  at 
the  owner's  expense  for  the  tenants'  use,  convenience,  or  even 
luxury,  all  of  which  require  more  or  less  mechanical  apparatus 
of  a  fixed  or  of  a  motive  character. 

The  growth  of  mechanical  conveniences  has  been  very  wide- 
spread during  recent  years,  and  the  general  effect  of  their 
adoption  in  buildings  has  been  to  promote  irregularity  and 
unsettlement  in  tenancies. 

These  conveniences  include  such  service  as  heating,  refrigera- 
tion, hot,  cold,  iced,  and  sterilized  water,  artificial  ventilation, 
elevator  operation,  and  gas  and  electric  lighting,  with  the  ac- 
companiments of  apparatus  for  the  necessary  production  of 
heat,  and  in  many  cases  the  further  accompaniment  of  appli- 
ances for  the  manufacture  of  power. 

Some  of  these  conveniences  must,  of  course,  by  custom  and 
usage,  be  regarded  in  these  days  as  having  become  almost  neces- 
saries. In  all  buildings,  for  instance,  a  certain  amount  of  sani- 
tary convenience  is  required  by  law.  But  the  extent  and 
character  and  even  the  location  of  such  apparatus  is  very  varied, 
and  is,  in  some  cases,  extravagant  as  regards  space,  and  there 
appears  to  be  little  agreement  upon  the  subject  of  its  desirable 

103 


Building  for  Profit 


position.  The  result  is  that  many  buildings  are  burdened  by  this 
service  with  unnecessary  cost  in  labor,  upkeep,  water,  and  even 
in  elevator  service.  And  in  connection  with  the  usage  of  sani- 
tary equipment,  the  wastage  of  water  alone  is  enormous  in 
volume  and  not  an  inconsiderable  amount  in  cost. 

The  heating  of  buildings  in  this  climate  must  be  regarded  as 
essential,  but  the  frequent  misuse  made  of  the  convenient  form 
in  which  heat  is  provided  is  noticeable,  and  is  a  result  of  the 
practice  of  providing  this  convenience  without  direct  charge 
being  made  for  it. 

The  provision  of  elevator  service  is  a  necessary  common  con- 
venience in  buildings  of  numerous  floors,  and  its  adequacy 
directly  affects  the  rate  of  income  of  the  property,  affording,  as 
it  does,  the  only  practicable  means  of  access  to  the  superimposed 
floors  required  to  provide  a  return  on  large  investments  in  land 
value. 

If  the  foregoing  were  the  only  services  of  a  mechanical  nature 
imposed  upon  the  owner,  the  burden  of  the  operation  of  build- 
ings would  not  be  so  severe  as  it  is.  But  the  obligation  to  render 
a  building  accessible  and  habitable  does  not  appear  to  be  neces- 
sarily extensible  into  obligations  to  afford  other  conveniences 
which  are  of  such  a  character  that  their  misuse  may  involve  the 
property  not  only  in  loss  of  income,  but  through  that  in  depre- 
ciation of  capital  value ;  nor  does  it  follow,  if  tenants  are  to  be 
attracted  to  a  building  only  by  such  means,  that  the  policy  may 
be  as  advisable  or  prudent  or  justifiable  as  would  be  that  of 
avoiding  the  responsibilities  and  uncertainties  attaching  to  such 
features,  and  accepting  a  less  rate  of  rental  without  them. 

Of  such  character  are  some  of  the  more  recent  inducements 
which  have  been  introduced  in  certain  properties,  and  they  are : 

Refrigerated  boxes  in  apartments. 
Free  ice  to  tenants. 

104 


Cost  of  Operating  Buildings 


Clothes-brushing  by  vacuum  apparatus. 

Cold  storage  for  clothing. 

Compressed  air  for  barbers'  use. 

Omnibuses  to  carry  children  to  and  from  school. 

Children's  playrooms  with  uniformed  attendants. 

Heated  conservatories  for  flowers. 

Free  telephone  service. 

Sterilized  drinking-water. 

Recent  Conventions  of  Building  Managers  have  been  oc- 
casions of  great  interest  to  all  those  concerned  in  the  numerous 
features  which  enter  into  the  operation  of  improved  real  estate, 
and  have  afforded  unique  opportunities  for  the  comparison  of 
experience,  and  of  the  results  of  the  work  of  those  who  are 
charged  with  the  responsibility  of  operating,  for  their  owners, 
buildings  of  every  description  in  all  parts  of  the  country. 

Much  interesting  information  has  been  afforded  by  such  ex- 
perts upon  the  details  of  costs  and  expenditures,  and  a  number 
of  references  have  been  made  by  them  to  the  numerous  burdens 
now  laid  upon  the  owners  of  property,  in  the  various  con- 
veniences which  competition  has  introduced  into  buildings. 

Upon  one  part  of  this  subject  so  general  an  agreement  was 
expressed  that  it  may  be  regarded  as  a  definite  and  wide-spread 
result  of  experience,  namely,  that  electricity  given  to  tenants 
without  charge  is  mercilessly  wasted,  and  its  value  is  not  appre- 
ciated. Frequent  instances  have  been  quoted  of  the  reckless 
usage  of  electric  force  by  tenants,  in  any  of  the  now  numerous 
conveniences  in  which  electricity  is  the  method  of  operation,  and 
of  the  burden  thus  laid  upon  property-owners,  where  the  prac- 
tice has  been  established  of  including  in  the  rent  an  assumably 
reasonable  supply  of  electrical  current  for  such  purposes. 

The  owner  of  a  large  office  building,  where  the  service  is  sup- 
plied free  from  his  own  generating  plant,  voiced  the  general 

Since  the  above  suggestion  was  presented  the  practice  has  become  general  of 
metering  to  tenants  their  supply  of  electric  energy,  with  advantage  to  owner 
and  occupant. 

105 


Building  for  Profit 


sentiment  on  the  subject  at  the  convention  at  Detroit  in  1909,  by 
describing  the  practice  as  ''giving  something  for  nothing  which 
is  regarded  as  of  no  value." 

The  natural  question  has  been  asked  whether  the  exclusion  of 
free  electrical  service  would  not  be  necessarily  followed  by  a 
corresponding  or  assumably  corresponding  reduction  in  rentals ; 
but  instances  were  cited  in  which  the  free  supply  of  current  had 
been  discontinued,  and  no  loss  of  rental  had  resulted. 

It  may  be  observed  that  it  is  not  merely  desirable  that  an 
owner  should  be  relieved  of  the  expense  of  the  manufacture  or 
purchase  of  this  source  of  supply  for  light  and  minor  con- 
veniences or  for  power  in  loft  buildings,  but  that  he  should  also 
be  relieved  of  the  responsibility  and  anxieties  attending  its  sup- 
ply, as  well  as  the  liability  toward  his  tenants  in  case  of  failure 
on  his  part  to  maintain  such  services,  if  contracted  for  directly 
or  indirectly  in  his  leases. 

In  the  case  of  the  use  of  electricity  for  power  and  lighting 
purposes  in  loft,  warehouse,  and  manufacturing  buildings,  it  is 
stated  by  several  prominent  owners  in  Manhattan  that  the  elim- 
ination of  the  free  service  has  not  only  removed  a  cause  of 
frequent  complaint  and  dispute  between  landlord  and  tenant, 
but  has  resulted  in  actual  economy  to  the  tenant  by  inducing 
greater  care  in  the  use  of  power,  and  the  recent  developments 
of  such  buildings  in  this  city  have  established  the  practice  of 
placing  upon  the  tenant  the  obligation  of  securing  his  own 
supply  of  power  from  a  public  source. 

Opinions  thus  expressed  by  men  of  wide  experience  and 
knowledge  of  conditions  in  all  parts  of  the  country  are 
impressive  and  conclusive.  If  owners  of  other  classes  of  build- 
ings which  are  similarly  burdened,  and  are  found  to  be  unpro- 
ductive or  undesirably  lean  in  their  return  upon  the  investment 
they  have  involved,  should  unite  in  divesting  their  properties  of 
such  uncertain  elements  of  outlay,  they  would  render  improved 

1 06 


Cost  of  Operating  Buildings 


real  estate  a  more  attractive  because  a  more  definite  investment. 
At  present,  to  a  considerable  extent,  the  operation  of  improved 
real  estate  involves  the  simultaneous  conduct  of  two  or  more 
businesses,  and  a  very  ancient  and  trite  saying-  long  ago  fore- 
shadowed the  fate  of  those  who  undertake  such  hazards. 

The  abandonment  of  power-generating  machinery  and  high 
pressure  steam  with  accompanying  outlay  in  fuel,  repairs  and 
labor,  and  many  subsidiary  expenses,  has  substantially  lowered 
the  operating  expense  of  many  buildings. 

Steam-heating  systems  have  been  reduced  to  simplest  form, 
with  much  advantage.  The  use  of  gas  for  heating  in  buildings 
of  moderate  proportions  is  found  to  afford  superior  con- 
venience, and  its  adaptability  to  automatic  control  eliminates 
the  expense  of  labor  and  provides  a  more  regular  and  con- 
trollable supply  of  heat. 

The  establishment  of  metered  electric  service  to  tenants  has 
enabled  the  owners  of  numerous  business  and  apartment  build- 
ings to  derive  a  reasonable  profit  from  the  purchase  at  whole- 
sale rates  of  the  total  amount  of  electric  energy  used  in  the 
building  and  its  sale  to  the  tenants  at  the  prevailing  public 
rates.  For  this  purpose  the  owner  usually  leases  electrical 
meters  and  contracts  for  their  maintenance  in  accurate  record- 
ing condition.  These  economic  processes,  by  improving  the  net 
income,  have  not  only  benefited  the  owners,  but  by  their  effect 
in  stabilizing  rentals  have  thereby  benefited  the  tenant  as  well. 


107 


VII 
MANUFACTURING  OR  POWER  MACHINERY 

THE  urgency  of  competition  with  other  buildings,  which 
has  led  many  owners  to  enter  into  those  obligations  to 
their  tenants  which  have  been  previously  referred  to, 
has  further  involved  certain  of  them  in  very  extensive  expendi- 
tures of  capital  and  much  unknown  future  expense  by  entering 
upon  the  manufacture  of  power  or  heat  for  these  conveniences, 
by  means  of  the  installation  and  operation  of  high-pressure 
steam-  and  power-generating  machinery  of  complex  and  ex- 
pensive character  and  of  limited  useful  existence. 

The  cost  of  installation  and  operation  of  these  domestic  facto- 
ries, which  are  often  quite  complicated  combinations  of  mechan- 
isms, is  greatly  enhanced  by  the  provision  of  necessary  space, 
which  is  usually  obtainable  only  by  the  most  expensive  part  of  a 
building's  construction,  namely,  the  excavation  of  cellars  or 
sub-basements,  which  may  be  otherwise  unnecessary. 

The  services  covered  or  provided  by  such  power  or  motive 
equipments  may  not  be  and  are  not  generally  the  largest  element 
in  the  operating  expenditures  of  a  building,  but  they  are  thus 
made  to  involve  a  relatively  large  share  of  capital  outlay  and  a 
disproportionate  share  of  the  depreciation  of  the  total  invest- 
ment. In  effect,  they  are  a  growth  upon  building  operation  in 
which  real  estate  investors  have  really  no  interest,  which  ren- 
ders the  investment  less  definite. 

The  actual  proportion  of  the  gross  income  involved,  inclusive 
of  depreciation,  in  the  manufacture  and  supply  of  power,  heat, 
etc.,  for  these  modern  conveniences  is 

1 08 


>sr 

~    "> 

3  "B 
^  = 

3    <u 


II 

II 

-1    rt 

rt    >> 

<u    o 


O     rt 
cn    o 

O  .5 

tj 
V 


Manufacturing  or  Power  Machinery 


In  loft  buildings,  about  .  .  .  .  13  to  14% 
In  business  buildings,  about .  .  .  15  to  17% 
In  elevator  apartment-houses,  about  23  to  25% 

The  practice  of  establishing  interior  heat-  or  power-generat- 
ing plants  seems  to  have  grown  out  of  past  deficiencies  in  public 
supplies  of  some  particular  form  of  service  installed  in  the 
building,  as,  for  instance,  in  the  use  of  elevators  operated  by 
hydraulic  force,  for  which  the  public  water  service  is  unsuited, 
and  of  which  there  is  no  available  commercial  supply  such  as  is 
established  in  some  European  cities  of  magnitude. 

The  provision  of  necessary  power  for  this  particular  purpose 
led  in  many  buildings  to  the  addition  of  other  engineering  appli- 
ances affording  other  services,  which,  as  above  remarked,  are 
not  similarly  obligatory  upon  the  ownership.  These  have  be- 
come largely  gratuitous,  being  included  in  the  established  rate 
of  rental,  and  have  thereby  become  the  subject  of  much  extrava- 
gance, waste,  and  misuse  on  the  part  of  tenants. 

As  rentals  decline,  the  relation  which  such  services  bear  to  the 
gross  rentals  increases  and  often  becomes  burdensome,  and  the 
relative  cost  of  the  production  of  power  also  increases  by  reason 
of  the  age  and  corresponding  inefficiency  of  the  domestic  fac- 
tory, while  the  tendency  of  usage  is  all  in  the  direction  of  in- 
crease and  brings  greater  demands  upon  the  apparatus. 

The  financial  bearing,  upon  the  investment,  of  the  provision 
of  machinery  or  power-manufacturing  appliances  in  a  building 
is  not  often  fully  appreciated,  it  being  assumed  that  such  ap- 
paratus justifies  its  existence  by  some  economy  in  cost  of  its 
output  as  compared  with  some  other  presumed  condition. 

The  location  of  such  apparatus  has  already  been  referred  to. 
It  necessarily  involves  the  use  of  some  portion  of  the  building 
below  the  ground  level,  and  sometimes  of  an  extension  of  the 
building  below  ordinary  basement  levels,  specifically  constructed 
for  this  purpose. 

109 


Building  for  Profit 


This  naturally  becomes  the  most  expensive  portion  of  the 
construction  of  the  building,  by  reason  of  the  excavation  of  solid 
materials  which  is  involved,  of  the  construction  of  retaining- 
walls,  and,  in  the  case  of  any  depth  exceeding  that  of  the  sewer 
or  drainage  system  in  the  vicinity,  of  the  provision  of  water- 
proofing, not  infrequently  accompanied  by  the  operation  of 
pumps  to  drain  away  seepage,  or  to  lift  sanitary  discharge- 
water  from  this  low  level. 

The  logical  purpose  of  engineering  appliances  thus  placed  is 
to  operate  the  required  services  and  conveniences  of  the  building 
in  the  absence  of  means  for  this  purpose  provided  by  a  municipal 
system  or  by  a  public  service. 

But  where  such  apparatus  is  installed  in  face  of  the  accessi- 
bility of  such  public  supplies,  the  purpose  of  the  installation  be- 
comes merely  competitive,  and  is  no  longer  to  be  regarded  as 
necessary.  The  commercial  value  of  such  apparatus  is  then  lim- 
ited to  its  ability  to  compete  with  the  exterior  service,  and  its  life 
of  effective  usefulness  ends  when  the  cost  of  its  output  equals 
the  cost  of  a  similar  output  purchasable  from  any  other  source. 

Such  supplies  may  be  obtainable  from  neighboring  installa- 
tions, but  then  require  consideration  from  the  viewpoint  of  their 
stability  and  reserve  capacity. 

There  are,  however,  generally  available  in  most  cities  munic- 
ipal or  public  supplies  of  various  characters.  Thus,  electrical 
service  is  practically  universally  available,  and  this  alone  covers 
the  operation  of  a  large  proportion  of  the  conveniences  and 
necessaries  in  modern  buildings. 

Usual  public  supplies  also  include  water,  gas,  and  in  some  sec- 
tions steam  for  heating  purposes,  and  in  other  cases  refrigera- 
tion. The  cost  of  such  supplies  may  be  regarded  as  generally 
liable  to  future  reductions  in  rates,  and  conservative  practice 
would  therefore  seem  to  dictate  provisions  for  their  future  use, 
even  if  their  present  use  be  not  adopted. 

IIO 


Manufacturing  or  Power  Machinery 


The  economic  value  of  power-generating  apparatus  is  com- 
monly established,  or  assumed  to  be  established,  by  the  differ- 
ence between  the  cost  of  a  public  or  neighboring  supply  and  the 
cost  of  the  same  service  provided  by  the  installed  apparatus ;  but 
this  limited  comparison  does  not  take  into  account  some  essential 
elements  which,  if  properly  considered,  are  found  to  place  very 
decided  limitations  upon  the  justifiable  expenditure  of  capital  in 
this  direction. 

In  the  case  of  mechanical  services,  the  economic  effect  of 
power  manufactured  for  their  operation  is  confined  to  that  por- 
tion of  the  operating  expenses  which  is  concerned  with  the  con- 
veniences of  the  building.  As  has  already  been  shown,  these 
form,  of  the  aggregate  income,  a  proportion  of  about  13  to  2$% 
according  to  the  character  of  the  building,  and  out  of  this  ex- 
penditure only  some  portion  is  of  such  nature  as  to  be  affected 
one  way  or  another  by  the  alternative  of  the  employment  of  a 
manufacturing  apparatus  or  of  public  services. 

The  establishment  of  machinery  in  a  basement,  which  has 
necessarily  formed  a  part  of  the  construction  of  most  modern 
buildings,  and  is  usually  included  in  the  general  cost  of  the 
building,  must  not  therefrom  be  assumed  to  be  unaccompanied 
by  expense  for  the  space  thus  occupied.  Basements,  by  reason 
of  the  demand  for  storage  space,  below  ground-floor  stores, 
offices,  banks,  and  particularly  in  apartment  buildings,  are  ad- 
juncts to  the  general  rentable  space  of  the  building,  and  in  com- 
puting its  average  renting  value  the  rentals  of  the  basement 
space  must  be  included,  as  has  been  done  herein,  as  a  part  of  the 
average  rent.  If,  therefore,  any  portion  of  a  basement  be 
diverted  from  utilizable  purposes  to  that  of  housing  apparatus 
which  does  not  pay  rent,  then  the  building  suffers  some  loss  of 
renting  capacity,  which  is  chargeable  against  any  apparent 
economy  effected  by  the  operation  of  the  appliances. 

Where  the  installation  of  machinery  in  a  basement  is  found 

in 


Building  for  Profit 


from  these  causes  to  bring  about  an  interference  with  the  rent- 
able value  of  the  building,  the  expedient  is  frequently  adopted 
of  constructing  a  sub-basement  or  sub-cellar  at  a  still  deeper 
level  for  the  special  purpose  of  providing  space  for  the  manu- 
facturing apparatus.  This  process  is  accompanied  by  the  pro- 
gressive expenses  of  construction  already  referred  to,  including, 
in  the  case  of  steel-cage  construction,  an  extension  of  the  steel 
columns,  which  is  necessitated  at  their  heaviest  part. 

Details  of  the  cost  of  such  sub-basement  construction  are  not 
here  necessary,  and  indeed  the  expenditures  upon  such  construc- 
tion are  so  varied  and  sometimes  so  disproportionate  that  it 
would  be  difficult  to  lay  down  any  definite  method  for  their 
computation.  Building  contractors  can,  from  their  experience, 
afford  facts  as  to  expenditures  in  past  construction  of  this 
nature,  but  it  may  be  moderately  estimated  that  sub-basement 
construction  of  the  least  difficult  character  involves  not  less  than 
double  the  cost  per  cubic  foot  of  building  construction  above 
ground. 

The  proportions  and  cost  of  engineering  machinery  thus 
located  are  very  varied,  but  the  natural  desire  of  those  interested 
in  its  design  and  in  its  operation  to  secure  very  ample  propor- 
tions and  reserve  capacities  tends  to  proportions  considerably  in 
excess  of  actual  requirements,  so  that  the  cost  of  such  power 
plants  may  vary,  according  to  the  degree  of  precautionary 
liberality  exhibited,  from  3%  to  7%  of  the  cost  of  the  entire 
building.  In  an  apartment  hotel  of  large  proportions  the  cost  of 
power-generating  apparatus  was  3.6%  of  the  cost  of  the  build- 
ing, and  the  cost  of  the  space  occupied  was  approximately  2.6% 
of  the  building. 

To  the  total  capital  outlay  upon  the  improvement  of  a  prop- 
erty, on  which  a  certain  rate  of  interest  is  to  be  secured  by  the 
average  rental,  the  cost  of  any  construction,  appliance,  or  ap- 

112 


Manufacturing  or  Power  Machinery 


paratus  which  is  not  directly  rent-earning  is  added,  and  the 
interest  thereon  must  be  derived  from  rent  of  some  portion  of 
the  rentable  space.  Therefore,  for  any  expenditure  of  capital 
in  such  directions,  either  an  enlargement  of  the  rentable  area  or 
an  increase  in  rentals  would  be  necessitated,  in  order  to  provide 
interest  upon  the  outlay  in  plant  and  upon  the  space  occupied  by 
it.  The  effect  upon  rental  rate  may  be  found  by  the  computa- 
tion : 

IOOX  (jF  +  'y)  X- 

r 

S  =—     7 

/  x  n 
in  which 

x  =  cost  of  construction  per  cubic  foot  x  height  in  feet  of 

the  space  occupied. 
y  =  cost  of  the  apparatus  contained  in  the  manufacturing 

plant,  divided  by  the  square  feet  occupied. 
i  =  rate  of  interest  on  investment. 
r  —  ratio  of  net  income  to  total  rentals,  including  therein 

any  economy  effected  by  the  use  of  the  plant, 
f  =  number  of  stories  in  the  building. 
n  =  percentage  of  the  net  rented  area  to  the  gross  rentable 

area  of  the  building. 
s  =  increase  in  rentals  per  square  foot  necessitated  by  a 

manufacturing  plant  and  the  space  it  occupies. 

The  point  may  be  illustrated  by  referring  to  one  of  the  exam- 
ples previously  figured,  in  which,  on  a  land  value  of  $100  per 
square  foot,  it  was  found  that  a  1 5-story  business  building,  at 
the  prevailing  average  rental  of  $1.80  per  square  foot  per 
annum,  would  return  4%  interest  upon  the  land  and  upon  the 
cost  of  the  building. 

Now  if  there  be  added  to  the  cost  of  the  building  and  the  land 


Building  for  Profit 


that  of  a  sub-basement  and  of  a  manufacturing  plant,  or,  say, 
$18.57  Per  square  foot,  the  interest  on  this  capital  is  found  to 
require  an  increase  of  the  rate  of  average  rental  from  $1.80  per 
square  foot  to  $1.95. 

It  will  be  evident,  however,  that  such  an  addition  to  rentals 
of  a  building  would  not  in  most  cases  be  practicable,  because  the 
rates  of  rentals  are  fixed  by  surrounding  circumstances,  and 
cannot  be  arbitrarily  raised  or  predetermined.  It  therefore  fol- 
lows that  additional  renting  space  must  be  added  to  the  building 
in  order  to  provide  for  the  addition  to  the  interest  account. 
Moreover,  the  cost  of  the  construction  of  such  additional  rent- 
ing space,  added  solely  for  the  purpose  of  earning  interest  upon 
the  capital  expended  on  the  plant,  becomes  another  addition  to 
capital  investment,  and  interest  must  also  be  earned  thereon. 

It  therefore  becomes  clear  that  for  every  unit  of  capital  in- 
volved in  mechanical  conveniences,  appliances,  or  apparatus  for 
the  generation  of  supplies  of  force,  and  in  space  for  the  same, 
additional  building  construction  has  been  added  or  is  to  be 
added  above  ground,  the  renting  of  which  shall  suffice  to  pay 
interest  upon  its  own  construction  and  interest  upon  the  appli- 
ances and  upon  the  space  occupied  by  them. 

The  effect  is  showrn  in  the  accompanying  diagram,  Fig.  15, 
illustrating  the  same  building  of  fifteen  floors,  at  the  prevailing 
rental  of  $1.80  per  square  foot. 

In  this  building  the  addition  of  a  manufacturing  plant  and 
space  therefor  has  involved  an  additional  capital  expenditure  of 
$18.57  for  the  square  foot  of  building  area,  requiring  interest 
amounting  to  74  cents  to  be  paid,  at  the  rate  of  4%  per  annum. 

The  interest  thus  required  is  found  to  involve  the  addition  to 
the  building  of  two  and  one-third  floors,  the  cost  of  which  adds 
another  $14.58  of  capital  expenditure.  The  additional  renting 
space  thus  provided  brings  in  a  net  return  of  56.7  cents  per  floor, 
from  which  has  to  be  deducted  25  cents  for  interest  upon  the 

114 


Manufacturing  or  Power  Machinery 


FIG.  15 


Rent  $1.80  per  sq.ft. 
Expenses  55^ 
Returns  4$  on 
site  and  building. 


15  sty.  Building 
Cost          $103.30 


Land  per  sq.  ft.  $100 
Site  1.1  sq.  ft. 
Cost  $110.00 

TotaJ  $213.30 


Xof 

18  ; 

17 


16 


15 


14 


13 


12 


Bst. 


Cost  $14.58 

Interest  .25 

Net  Returns  .74 


!    Sub,Bst.!    L. 


Rent  $1.80  per 
sq.  ft. 

Expenses  55^ 
Returns  4f»  on 
site,  building, 
plant,  etc. 


17>i  sty.  Building 
fcost     $136.45 


Site  Cost  $110.00 
Total   $246.45 


Building  for  Profit 


cost  of  these  floors,  leaving  available  31.7  cents  per  floor,  or 
from  the  two  and  one-third  floors  the  74  cents  required  for 
interest  on  the  plant  and  space  below  ground.  The  additional 
total  capital  expenditure  is  $33.15,  which  is  an  increase  of  32% 
on  the  cost  of  the  building. 

It  will  be  evident  that  if  this  capital  be  not  expended  upon 
apparatus  and  its  interest-producing  rental  space,  there  will  be 
resultant  effects  which  may  be  properly  credited  toward  any 
additional  cost,  if  such  there  should  be,  of  public  services  or  sup- 
plies taking  the  place  of  the  output  of  the  manufacturing  ap- 
paratus. 

Thus,  not  only  will  the  interest  on  the  capital  outlay  be  saved, 
but  a  smaller  amount  of  capital  will  have  been  engaged  upon  the 
maintenance  of  the  land  value,  and  a  lesser  extent  of  deprecia- 
tion and  deterioration  of  the  whole  building  will  have  been  in- 
volved, while  the  property  will  be  proportionately  less  of  a 
target  for  present  and  future  taxation.  Increase  of  height, 
which  is  required,  may  also  be  avoided,  which  would  have  in- 
volved not  only  additional  relative  cost  of  the  construction  of 
the  whole  building,  but  also  an  addition  to  the  relative  cost  of 
operation  of  the  building. 

In  further  considering  this  investment  of  capital  upon  the 
appliances  and  the  rentable  space  connected  therewith,  the  ques- 
tion will  naturally  arise  whether  the  engagement  of  capital 
therein  can  produce  returns  or  offer  advantages  equivalent  to 
that  of  additional  renting  space  provided  by  the  same  capital 
expenditure. 

This  consideration  may  be  applied  to  many  other  conditions 
than  the  operation  of  buildings ;  for  instance,  the  manufacturer 
who  engages  his  capital  in  the  competitive  manufacture  of  some 
special  material  entering  into  part  of  his  product  may  not  be 
advantaged  by  the  transaction,  because  the  same  amount  of 
funds  expended  in  means  or  apparatus  for  extending  the  sale  or 

116 


ABANDONED  MACHINERY 

"The  commercial  value  of  such  apparatus  is  limited  to  its 
ability  to  compete  with  an  exterior  service" 


Manufacturing  or  Power  Machinery 


enhancing-  the  value  of  the  complete  product  might  bring  in  a 
greater  net  profit  by  increasing  the  gross  output. 

The  same  principle  appears  in  the  application  of  manufactur- 
ing machinery  in  buildings.  If  it  be  found,  for  instance,  that  a 
supply  of  gas  be  desirable  or  necessary  in  a  building,  it  does  not 
follow  that  a  gas-manufacturing  plant  competing  with  the  pres- 
ent price  of  a  public  supply  of  gas  will  produce  enough  return 
by  any  difference  between  price  of  that  supply  and  cost  of  its 
own  output  to  justify  the  expenditure  accompanying  its  installa- 
tion, when  compared  with  the  results  derivable  from  an  ex- 
penditure of  the  same  capital  in  enlarging  the  area  or  improving 
the  rentable  character  of  the  tenantable  part  of  the  building. 

Thus,  to  refer  to  the  previous  illustration  of  a  1 5-story  build- 
ing, if  we  assume  that  the  expenditure  of  $18.57  involved  in  a 
plant  should  be  expended  instead  in  constructing  additional 
renting  space,  it  would  add  (at  the  same  rate  of  cost  of  con- 
struction) three  stories  to  the  assumed  square  foot  of  vertical 
section  of  the  building.  The  rentable  space  thus  provided  would 
bring  in  a  gross  addition  to  rents  of  $3.78  per  annum.  If  we 
should  assume  that  the  purchase  of  supplies  of  a  mechanical 
nature  from  public  services  instead  of  their  manufacture  on  the 
premises  would  involve  an  addition  of  as  much  as  25%  to  the 
cost  of  the  entire  mechanical  services,  this  would  be  but  one 
quarter  of  one  fifth  of  the  gross  income,  and  in  this  instance 
would  amount  to  95  cents. 

Deducting  this  entire  amount  from  the  gross  return  o£  the 
three  added  floors,  still  leaves  a  net  addition  to  the  rentals  of 
$2.83. 

Reducing  this  amount  to  the  net  of  45%,  leaves  $1.27,  which, 
upon  the  expenditure  of  $18.57,  brings  back  interest  at  nearly 
7%  per  annum,  a  return  which  is  much  higher  than  that  obtain- 
able by  the  investment  in  the  plant  and  cellar. 

Finally,  the  security  afforded  by  a  building  to"  a  mortgagee 


Building  for  Profit 


is  not  proportionately  increased  by  the  capital  expended  upon 
machinery,  because  the  life  of  the  latter  is  shorter  than  that  of 
the  building,  and  involves  future  expenditures  which  might  fall 
upon  the  mortgagee.  Such  apparatus  does  not  form  a  security 
for  bonded  or  mortgage  funds  of  the  same  stability  and  life  as  a 
building  or  land. 


118 


VIII 

APARTMENT-HOUSES,  FAIR  VALUES, 
AND  FAIR  RENTS 

IN  residential  apartment  and  tenement  buildings  the  short- 
age of  housing — which  is  not,  of  course,  a  permanent 
condition — enabled  many  owners  of  such  properties  to 
fill  all  vacancies  and  thus  increase  their  gross  income.  In  spite 
of  large  accompanying  advances  in  the  cost  of  fuel  and  labor, 
by  close  economy  in  upkeep  and  services  they  have  been  able 
to  maintain  that  income  with  moderate  increase  in  rents.  But 
in  other  instances  less  considerate  owners  advanced  the  rent  to 
extremely  high  rates.  Upon  a  new  level  of  value,  thus  created, 
speculative  purchasers  or  lessees  endeavored  still  further  to 
add  to  the  rate  of  return  by  additional  increases  in  rental.  The 
process  became  so  ill  regulated  and  oppressive  that  a  large 
number  of  tenants  combined  to  demand  restrictive  legislation, 
which  has  been  enacted  in  several  States,  whereby  the  courts 
are  now  empowered  to  decide  upon  the  rate  of  rental  in  resi- 
dential buildings,  and  the  owner  is  also  made  personally  re- 
sponsible to  the  law  for  the  adequate  maintenance  of  such 
services  as  heat  and  elevator  operation,  for  the  proper  upkeep  of 
the  structure,  and  can  be  fined  or  even  imprisoned  if  in  default. 
The  speculative  process  of  successive  sales  and  the  substi- 
tution of  the  irresponsible  lessee  for  the  owner  were  thus  in- 
continently checked,  and  the  sale  of  such  properties  at  enhanced 
speculative  values  became  restricted.  New  buildings  now  com- 
ing into  existence  with  unexampled  rapidity  will  eventually 

119 


Building  for  Profit 


meet  the  demand  for  housing  accommodation,  and  excessive 
rates  of  rental  must  decline,  bringing  down  with  them  any  un- 
substantial assumed  values  of  the  properties. 

Residential  property  was  and  is  entitled  to  substantial  in- 
crease of  income  required  to  cover  the  advanced  prices  of  fuel, 
labor,  and  repairs,  and  sufficient  also  to  earn  a  net  return  upon 
a  properly  established  invested  value  at  a  rate  not  less  than  that 
obtainable  in  the  investment  market  for  securities  of  equal 
standing.  Such  an  increase  is  necessary  merely  to  maintain  the 
investment.  But  any  additional  income  is  dependent  upon  the 
permanency  of  high  rentals,  and  the  conservative  investor  will 
do  well  to  consider  the  question  whether  rent  raised  to  a  high 
level  during  a  period  of  emergency  can  be  regarded  as  per- 
manent. 

Xor  can  it  be  assumed,  merely  because  the  cost  of  new  build- 
ing construction  has  advanced  to  high  levels,  that  an  existing 
building  has  thereby  advanced  in  value  to  a  similar  extent. 
Such  comparative  worth  could  only  come  into  practical  consid- 
eration in  case  of  the  destruction  of  an  existing  building,  and 
meantime  it  constitutes  only  a  very  good  reason  for  increasing 
the  extent  of  fire  insurance  to  cover  the-  enhanced  cost  of 
reproduction  in  case  of  disaster.  In  point  of  fact  these  ad- 
vanced costs  of  construction  rendered  new  buildings  so  un- 
attractive to  the  builder,  operator,  mortgagee,  and  investor 
that  the  process  of  new  construction  was  completely  halted, 
and  was  only  recommenced  when  a  reduction  in  taxation  was 
brought  about  roughly  commensurate  with  the  added  cost  of 
construction. 

It  has  always  been  the  case  that  the  tenement  class  of  resi- 
dential property  is  required  to  produce  a  high  rate  of  return 
in  order  to  render  it  attractive  and  marketable,  while  the  more 
elaborate  class  of  apartments  in  which  leases  are  obtainable, 
and  which  have  heretofore  been  managed  with  little  risk  and 

1 20 


Apartment-houses,  Fair  Values,  and  Fair  Rents 

personal  liability,  find  a  market  at  a  lower  rate  of  interest  on 
their  investment. 

This  scale  of  rates  of  return  presents  the  same  complexion 
under  conditions  of  high  rents  and  higher  prices  of  money. 
But  the  one-time,  well  established  return  providing  5  to  6l/2% 
on  investment  in  residential  property  has  now  advanced  to 
rates  of  7  to  10%.  It  is  probable  that  this  higher  level  will 
be  permanently  required  to  attract  investors  to  properties  to 
which  legal  complexities  and  personal  liabilities  are  now  at- 
tached. Thus  as  an  illustration  the  first  of  the  tenement 
buildings  in  the  table  on  page  41  would  require,  in  order  to 
cover  enhanced  expenses  and  return  10%  upon  its  established 
book  value,  a  rental  of  86  cents  per  square  foot,  or  an  increase 
of  nearly  60%.  If  iorr  should  have  been  added  to  book  value, 
either  by  assumption  or  by  a  sale,  then  to  maintain  that  value  the 
rent  would  have  to  be  raised  to  90  cents,  or  68% .  A  second  sale 
or  addition  to  book  value  of  another  10%  would  require  another 
increase  in  rentals  to  $1.00,  or  83%  increase. 

The  proportion  of  the  book  value  of  the  property  repre- 
sented by  the  annual  gross  rent  has  changed  by  the  general 
advances  in  rents  and  rates,  so  that  in  the  cold-water  class  of 
tenement,  at  a  return  of  10%,  the  gross  rent  becomes  about 
15  4/10%  of  the  book  value,  and  the  ratio  of  the  rents  to  the 
book  value  is  as  i  to  6  4/10. 

Where  the  operating  expense  is  greater,  as  in  the  steam- 
heated  class  of  apartments,  a  return  of  10%  involves  rentals 
aggregating  17  2/10%  of  book  value,  or  a  ratio  of  rents  to 
value  of  i  to  5  8/10. 

Rentals  have  also  greatly  increased  during  the  housing 
shortage  in  the  more  expensive  class  of  apartment  buildings. 
The  occupancy  of  such  apartment  buildings  has  been  the  sub- 
ject of  much  acrimonious  discussion  and  a  vast  extent  of 
litigation  in  regard  to  what  constitutes  a  proper  rental.  The 

121 


Building  for  Profit 


ascertainment  of  a  fair  rental  presents  much  difficulty  because 
it  necessarily  introduces  the  question  of  what  is  the  real  value 
of  the  property,  and  also  what  constitutes  a  reasonable  rate 
of  return  upon  that  value. 

The  assessed  valuation  has  been  suggested  as  a  basis  for 
fixing  fair  value.  The  proposal  is  made  that  1570  be  added 
thereto,  constituting  a  "minimum"  value  which,  being  thus 
determinable  by  established  official  figures,  could  be  utilized 
by  the  courts  as  a  general  basis,  leaving  it  to  the  owner  to 
prove  any  higher  value.  By  this  plan  the  assumed  basis  of 
assessment  would  be  &$%  of  market  value.  This  plan  offers 
a  workable  basis,  and  if  adopted  it  would  become  the  means  of 
adjusting  assessments  to  some  fairly  uniform  relation  to  true 
values,  because  it  would  then  be  to  the  interest  of  all  parties 
to  see  that  the  assessment  accurately  indicated  that  value. 

The  rate  of  interest  on  the  value  thus  ascertained  should 
be  commensurate  with  prevailing  circumstances  in  the  money 
market,  and  the  net  return  should  be  graduated  according  to 
the  character  of  the  building  and  its  location. 

The  following  tabulation  shows  the  rentals  necessary  to 
maintain  upon  any  book  value  and  for  various  classes  of  build- 
ings the  graduated  rate  of  return  suggested,  and  also  gives 
the  relation  which  such  rentals  bear  to  the  book  value  of  the 
property. 


Class  of  Building 

Book  Value 
of  Rents 

Ratio  of  Rent  to 
Book  Value 

Operating 
Expense  and 
Taxes  of 
Gross  Rents 

Net   Income 
of 
Gross  Rents 

Rate  of 
Interest  on 
Book  Va'.ue 

Cold-water  tenements   .     . 

% 

I5-87 

I   tO  6.3 

*>/ 
/O 

37 

% 
63 

*/ 

SO 

10 

Hot-water  tenements    .     . 

16.66 

i  to  6 

46 

54 

9 

Flats,  heat  and  hot  water   . 

18.18 

i  to  5.5 

53-8 

46.2 

8-5 

New  law  "walk-up" 

J9 

i  to  5.25 

57-9 

42.1 

8 

Elevator  apartments     .     . 

"9-73 

i  to  5.06 

62 

38 

7-5 

122 


Apartment-houses,  Fair  Values,  and  Fair  Rents 

Many  buildings  pass  through  periods  of  depression  and  ex- 
cessive competition  during  which  their  net  earnings  are  less 
than  a  prevailing  rate  of  interest,  and  even  in  some  cases  re- 
sult in  actual  loss. 

This  situation  has  been  used  by  some  owners  to  justify,  dur- 
ing the  period  of  acute  shortage,  an  increase  of  rents  to  a 
level  sufficient  to  recoup  them  for  these  prior  losses. 

The  policy  may  appear  justifiable,  but  its  application  is  un- 
fair. To  the  extent  that  a  new  basis  of  rentals  will  re- 
establish the  current  market  value  of  the  property,  the  present 
tenant  can  have  no  complaint,  but  to  require  tenants  to  make 
good  deficiencies  created  by  past  conditions  over  which  they 
had  no  control,  and  the  benefit  of  which  passed  to  other 
tenants,  is  evidently  unfair.  The  owner  of  improved  real 
estate  must  expect  variations  in  certain  conditions  affecting  the 
income  which,  if  understood  and  anticipated,  may  be  largely 
discounted  or  negatived.  Misfortune  of  course  may  attend  the 
best  efforts,  but  on  the  whole  real  estate  has  afforded  relatively 
less  disturbance  and  loss  than  other  lines  of  investment. 

In  a  rather  despairing  effort  on  the  part  of  the  public 
authorities  to  induce  the  construction  of  new  housing,  resort 
was  had  in  the  State  of  New  York  to  a  system  of  temporary 
reduction  of  municipal  taxation.  New  buildings  for  resi- 
dential purposes  are  at  present  exempted  from  taxes  up  to 
certain  values,  the  taxes  on  the  land,  however,  continuing. 

The  concession  proved  sufficiently  attractive  to  recommence 
the  construction  of  a  large  number  of  new  dwellings  and  tene- 
ment buildings.  Though  constructed  at  a  high  cost  of  ma- 
terials and  labor,  buildings  erected  under  these  circumstances 
find  tenants  at  the  same  prices  as  existing  buildings  of  equal 
character.  Evidently,  therefore,  the  ten-year  reduction  in 
taxation  may  be  regarded  as  practically  offsetting  the  increased 
cost  of  production. 

123 


Building  for  Profit 


In  that  case,  the  owner  cannot  afford  to  ignore  the  fact  that 
the  annual  relief  is  but  temporary,  and  that  the  extra  cost 
of  construction  of  his  building — over  and  above  that  incurred 
by  earlier  buildings  with  which  he  is  competing — must  be  dis- 
posed of  within  the  period  of  exemption. 

After  the  building  reverts  to  full  taxation,  unless  by  then 
the  excess  costs  shall  have  been  written  off,  it  will  stand  at  a 
disadvantage  in  regard  to  its  competitors  of  less  invested  value, 
and  may  be  worth  in  the  market  no  more  than  they  are. 

The  owner,  therefore,  is  justified  in  regarding  the  reduction 
in  taxes  as  a  concession  intended  to  meet  his  temporary  ex- 
cessive overexpenditure  and  as  being  designed  to  provide  relief 
in  the  present  necessity  for  housing.  The  amount  which  is 
thus  saved  in  taxation  cannot  be  applied  in  reducing  the  rents 
of  tenants. 

This  matter  has  taken  a  very  definite  form  in  some  cases  in 
which  mortgagees  have  required  that  the  excess  cost  of  build- 
ing shall  be  paid  off  by  annual  instalments  upon  the  mortgage. 
It  is  evident  that  the  funds  for  such  instalments  can  be  de- 
rived only  from  rentals. 

Objection  has  been  made  by  tenants — who  are  now  begin- 
ning to  show  a  very  desirable  concern  in  such  subjects  wrhich 
have  long  affected  their  own  interests — to  the  inclusion  of  de- 
preciation in  the  computation  of  an  official  rate  of  rental,  on 
the  ground  that  the  tenant  is  thereby  purchasing  the  fee  of  the 
property  for  the  landlord.  But  this  view  is  unsound.  The 
tenant  is  interested  in  providing  for  depreciation  as  a  means 
of  continuing  the  existence  of  the  building  or  its  successor. 
If  the  sum  set  aside  for  depreciation  were  invested  its  gradual 
accumulation  would  replace  the  capital  expended  upon  the 
building,  and  rentals  should  be  reduced  when  the  fund  has 
entirely  accumulated.  But  the  reduction  could  be  carried  on 
only  as  far  as  the  end  of  the  economic  life  of  the  structure,  for 

124 


Apartment-houses,  Fair  Values,  and  Fair  Rents 

by  that  time  the  capital  invested  in  it  has  disappeared  and  its 
renewal  or  replacement  requires  the  use  of  the  accumulated 
depreciation  fund. 

It  cannot  be  assumed  that  investors  will  be  willing  to  lay 
out  a  sum  of  money  in  the  construction  of  a  building  which 
at  the  end  of  a  term  of  years  is  entirely  to  disappear.  By 
neglect  of  provision  for  depreciation  in  only  too  many  cases 
this  has  actually  occurred,  and  often  as  much  to  the  incon- 
venience of  tenants  as  to  the  detriment  of  landlords. 

Depreciation  is  therefore  properly  included  in  rentals, 
though  it  should  be  compounded  by  crediting  interest  so  as 
to  accumulate  at  the  most  rapid  rate  possible. 

The  present  complexities  of  ownership  and  the  existing  dis- 
cordance between  the  interests  of  owners  and  tenants  will  be 
desirably  modified  by  a  more  general  understanding  of  those 
underlying  principles  controlling  the  improvement  of  habitable 
real  estate,  which  have  been  set  forth  in  these  pages. 

And  we  may  look  forward  to  a  time  when,  by  a  better  com- 
prehension of  their  mutual  interest  in  the  development  of  the 
homes  and  business  buildings  of  our  country,  a  new  spirit  of  co- 
operation will  arise  between  those  who  use  and  those  who  own 
improved  real  estate. 


125 


INDEX 


Advance  in  Rental 39,  49,  119 

Advertising,    Value    Attached 

to    33,35 

Age,  Effects  of  52 

Amortization  Table 77 

Ancient  Buildings    61 

Annuity  Table    77 

Apartment-houses    29 

30,  41,  72,  119  to  122 

Fair  Rents  in 121,  122 

Fair  Value  of 1 19,  120,  122 

Minimum  Value 122 

Operating  Expense 41 

43,97,  121,  122 

Rentals   in    42,  43,  47 

Apparatus 

Earning  Existence  of 88 

Electrical    81 

Inefficient   86 

Mechanical   82,  83 

Motive    81 

Non-earning    113 

Appliances 

Complexity  of 8l 

Mechanical  80 

Motive    86 

Appreciation    5,  66 

A  Real 16 

An  Assumed   i,  15,  32 

Capitalized  16 

Established    16 

Not  Realizable 15 


Of   Land   Value lS~27i  66 

Of  Rentals i,  14 

Rate    of    15,16,24,27 

Area 

Increase  in 9 

Reduction  of   33,  34 

Assessed  Values 122 

Assessed  Value 

Related  to  Earnings 97 

Assessments    17 

B 

Basements    13,  in 

Rentals  -of 49 

Boilers,    Depreciation   of... 91,  92 

Brick  Buildings    58,  59 

Bronx,  Land  Values  in 16 

Building 

Capital  Embarked  in 18 

Over- 24 

Buildings 

Ancient   61 

Brick  and  Stone.  .  .58,  59,  66,  67 

Business    69,  70 

Commercial    5 

Component  Parts  of   ...  .57,  62 

Composite    5,  54 

Cost  of    18,  29,  32, 47 

Definition  of 5 

Depreciation  of 19 

24,26,50,51 


127 


Index 


Buildings  (Continued) 

Durability    of    54 

Earning  Ability  of 15,  68 

Economic  Life  of 56 

66,  68,  75,  76 

Effect  of  Increased  Cost.  ...   49 

1 20,  124 

Effect  on  Taxation 25 

Elementary    5,  10,  1 1 

Frame    58,  59 

Height  of   6,  7,  9,  13 

Hotel   68,69 

Loft    39,  40 

Modern    60,  6 1 

Xot  Permanent   68 

Office  37.38,58,59 

Purpose  of   5 

Removal   of    33 

Residential    40,  72,  1 19-122 

Sinking-fund  for 18 

Substantial   Parts  of    ....  57,  59 

"Taxpayer"    75,  76 

Usage  of 54,  60 

Useful  Life  of 7 


Carrying  Charges 7,  13,  65 

Coley,  C.  T 94 

Component  Parts  of  Buildings  62 
Construction 

Ancient   50 

Brick 62 

Character  of 56 

Comparative  Cost 6,  25 

Complex   61 

Costs  of    47 

Exterior  .  61 


Frame    62 

Modern    50 

Modern  Fireproof 62 

Over-expense  in   70,  73 

Relative  Costs  of 6,  7,  8,  25 

Conveniences 72 

Cost  of   101,  102,  109 

Mechanical 103,  104,  105 

Costs 

Construction .6,  25,  47 

Cubic    Foot    6,  7,  8 

Operating   10,94,95 

Relative    65 

Relative  Construction.  .  .6,  7,  25 

Costs  of 

Conveniences    101,  102,  109 

Power  Machinery 112 

Courts,  Light 34 

D 

Davies,  J.  Clarence 16 

Decay 

Financial    51,  74 

Physical    51 

Decorating   71 

Decoration    ...  5.  20,  36,  37,  79,  102 

Decorative  Features 

Expenditure  on 20 

Non-earning 20 

Depreciation    22 

24,25,31,32,37,50,52 

Classification  of 55 

Economic    51,  ?6 

Effects  on  Land  by 20 

Funds  for   18,  26 

Included  in  Rent 124,  125 

Physical    53,76 


128 


Index 


Depreciation  (Continued}  PAGE 

Process  of    67 

Depreciation  of 

Boilers 91,  92 

Buildings    19,  24,  26,  50,  51 

Deterioration  5,  50,  51,  52 

Deterioration  of 

Equipments    85 

Motive  Appliances 86 

Piping    87 

Power  Plants    79 

Durable  Parts  of  Buildings  .  .  62 

63,64 

E 

Earnings  15 

Divisions  of  •9~I4 

Fall  in  15 

Ratio  to  Land  Value. 26,  27,  28 

Rise  in 14 

Economic  Depreciation  ...  .51,  76 

Economy  in  Operation 107 

Electric   Apparatus    81 

Electric   Service    .  .2,  105,  106,  no 
Electricity 

Metering 105 

Wastage   of    105,  106 

Elementary  Building  .  . .  .5.  10,  n 

Elevator    Service    86,  104 

'Elevators 88-91 

Inefficiency  of   86 

Equipments    7 

Demands  on    91 

Economic  Deterioration  of.   85 

Mechanical 79,  80 

Motive    108 

Proportion  of  Cost  of 87 


Relative  Life  of 83,  84,  85 

Remodeling    92 

Sanitary 80 

Expenditures 

Operating 35,  36,  95,  101 

Over-   70 

Proportion    of 44,  45,  46 

Relation  to  Increased  Rents.   95 
Unnecessary    32,  71 


Factory,   Modern    66,  67 

Financial  Decay   51,  74 

Flats    41 

Rentals  in 41,  46 

Formula  for 

Increase   in    Rentals   Neces- 
sitated by  a  Plant   113 

Rental   to   Produce   Interest 
on  Building   12 

Rental  to   Produce   Interest 
on  Site 10 

Total  Invested  Value 28 

Frame   Buildings    58,  59 

Life   of    5,  62 

Frame  Construction  .  .   62 


Gillender  Building 70 

H 

Heating 104 

Gas 107 

Plant    109 


129 


Index 


Height 

Addition   to    9 

Economic    g 

High-speed  Machinery.  .81,  82,  85 

Hotel    68,69 

Houses 

Apartment    .29,30,41,42,47,72 
Tenement   41,  47,  72,  73 

Hurd,  Richard  M 55 


Income  Tax  2,  53 

Increase  of  Light  33,  40 

Increment  in  Land  Value 

Apparent 16 

Dependence    upon    22 

Phenomenal    22 

Realized    16 

Relative  to  Loss   on    Build- 
ing     20-22 

Remunerative    14 

Time  to  Realize   24 

To  Offset  Depreciation    ...   22 

Unearned    16 

Unearning    16 

Inducements    104,  105 

Interest  Rates i,  32,  120-122 

Invested  Values   44,  45 

Investments 

Disproportionate    16 

Over-   29,31,32,68 


Land,  Burden  Laid  upon 18 

Land  Values 

Appreciation  of I5~27y  66 


Building  Ahead  of 26 

City   55 

Effect  on  Rentals 43 

Established    ...30,31,32,35,41 

Improved    5 

In   Bronx    16 

Increase  in  ....  14,  16,  20,  22,  24 

Rate  of  Advance  in 20 

Ratio  of,  to  Building 28 

Ratio  of,  to  Income 28 

Relation  between,  and 

Building    9 

Tide  of   72 

Legislation 3,  1 19 

Life  of 

Brick   Buildings    58,  59 

Mechanical  Apparatus  .  .  .82,  83 

Motive  Apparatus    87-90 

Motive  Appliances  82 

Office   Buildings    58-60,  65 

Light 

Increase  of 33,  40 

Value  of  102 

Locality 

Development  of 16 

Effects  of  Improvements  in.    16 

Loft   Buildings    39,  40 

Power  in    106 

Relative  Costs  of 7,  8 

M 
Machinery 

Commercial    1 10,  1 18 

Cost  of 112 

Expenditure  on 117 

High-speed    81,82,85 


130 


Index 


Machinery  (Continued}  PAGE 

Power    108,  118 

Maintenance  .  .52,  53,  100,  101,  103 
Manhattan 

Absorption  of  Land  on  ....   24 

Isolation  of 24 

Mechanical 

Apparatus    82,  83 

Appliances    80 

Conveniences     103-105 

Equipments    79,  80 

Meters,  Electric   105,  107 

Modern  Buildings    60,  61 

Mortgage  Rates i,  14,  37 

Motive  Apparatus 81 

Life  of 87,88,89,90 

Motive  Appliances 

Economic  Deterioration  of.   86 
Physical  Life  of... 82 

N 
Net  Earnings 

Division  of 9,  10,  12,  13,  14 

Related  to  Site   26,  27,  28 


Obsolescence    53 

and  see  Economic  Deprecia- 
tion 

Office  Buildings    ....37,38,58,59 

Life  of 58,  59,  60, 65 

Relative  Costs  of 7,  8 

Rentals  in 47 

Operating  Costs   94,  95 

Economics  in  .  ,    10 


Operating  Expenditures 35 

36,95,  101,  107 

Over-building    24 

Over-expense,  Effect  of 70 

Over-investment   ...  .29,  31,  32,  68 


Past  Losses   123 

Personal  Liabilities   3,  119 

Physical 

Decay 51 

Depreciation    53-76 

Piping   79 

Deterioration    of    87 

Systems  of  81 . 

Plants 

Heating    109 

Power    Plants    38,  79 

Power   for  Profit    53 

Power  Machinery 108,  118 

Capital  Involved  in 114 

115,  116 

Commercial  Value  of 92 

Cost  of   112 

Economy  of 1 1 1 

Power  Plants 38,  79 

Abandonment  of 107 

Deterioration  of   79 

Loans  on 92,  93 

Power  Supplies 106 

Property 

Improvement  of   18 

Unimproved    5 

Value  of  5 

Public  Supplies no 


Index 


Rate  of 

Appreciation    15,  16,  24.  27 

Depreciation    67 

Interest,  Effect  of 43 

Real  Estate,  Fundamental 

Form  of    6 

Reduction  of  Building  Area. 33,  34 

Remodeling    53,  57,  68 

Removal  of  Buildings 33 

Renewals    ^6 

Rentals 

Advances  in 39,  41,  49,  119 

Affected  by  Land  Values.  . .   43 
Apartment-house    .  . .  .42,  43,  47 

Appreciation  of i,  14 

Basement    49 

Competition  in    6,  46 

Fair    121.  122 

Flat-house    41,  46 

Formula  for 10,  12 

Ground  Floor 40 

Office  Building   47 

Per  Cubic  Foot 47 

Per  Square   Foot 10 

12,13.  14-47 

Prevailing  Rate 28,  47 

Proportion  to  Value    ....37-43 

Rate  of  10,  16,  35,  47 

Relation  of,  to  Cost 47 

Relation  of,  to  Height.  . .  .47,  48 
Relation  of,  to  Value.  . .  .43,  122 

To  Justify  Investment 14 

Repairs    52,  53,  56 

Resale  of  Electricity 107 


Residential  Buildings    40,  72 

Roundhouse    66,  67 


Sanitary  Equipments 80 

Shortage   of   Buildings i,  14 

Sinking-funds,  for  Building.  . .    18 
Site 

Earning    Capacity    of 26 

Excessive  Building  on    ....   26 

Street   Frontage    33 

Sub-basements    109,  no,  112 

Supplies 

Power    106 

Public   !..  ,.iio 


Table  of 

Amortization   77 

Annuity 77 

Apartment-house    Rentals..   42 
Component   Parts  of  Build- 
ings       62 

Costs  of  Construction 47 

Depreciation    55 

Economical  Existence  of 

Buildings    76 

Economical  Existence  of 

Mechanical   Apparatus    .  .   89 

Flat-house  Values 41 

Life  of  Parts  of  Buildings.  .  62 
Operating  Expenditures  ...  95 
Physical  Existence  of 

Mechanical   Apparatus    .  .   82 
Rentals  and  Costs  of 

Construction    47 

Taxation  per  Room 100 


132 


Index 


Table  of  (Continued)  PAGE 

Taxation  Related  to  Rentals  97 
Tenement-house  Values  ...   41 

Taxation 1 6,  17,  26,  94-100 

Income    2,  53 

Irregularities    97 

Per  Room 100 

Remission  of   123,  124 

"Taxpayers"    75,  76 

Tenancies  Multiplied 9 

Tenement-houses    ...  41,  47,  72,  73 
Alterations  to   73 

U 
Unimproved   Property,   Value 

of    5 

Unoccupied  Space,  Value 

of    33.34 

Upkeep    9>52>53>?6 


Power   Machinery    92 

Property   5 

Unoccupied   Spaces    33,  34 

Values 

Actual  Land 16 

Building  Ahead  of  Land  ...   26 

Capitalized   44,  45,  46 

Enhanced    22 

Example  of  Computation 

for 29,32 

Formula  for  Total  Invested  28 

Increment  in  Land 14 

16,  20,  22,  24 

Invested    44,  45 

Providing  for  Enhanced.  ...   24 

W 
War  Conditions L,  14 


Value  of 

Light  . 


102     Zoning  System I 


133 


INITIAL  FINE  OF  25  CENTS 


YE  01245 

.    ER  ELEYUBRARIET 


V/.f 


